UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2007
Commission
File No. 000-22490
FORWARD
AIR CORPORATION
(Exact
name of registrant as specified in its charter)
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Tennessee
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62-1120025
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer Identification No.)
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430
Airport Road
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Greeneville,
Tennessee
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37745
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(Address
of principal executive offices)
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(Zip
Code)
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(423)
636-7000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $0.01 par value
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The
NASDAQ Stock Market LLC
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(Title
of class)
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(Name
of exchange on which registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer x
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
reporting Company¨
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(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes ¨ No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2007 was approximately $998,430,784 based upon the
$34.09 closing price of the stock as reported on The NASDAQ Stock Market
LLC on that date. For purposes of this computation, all directors and
executive officers of the registrant are assumed to be affiliates. This
assumption is not a conclusive determination for purposes other than this
calculation.
The
number of shares outstanding of the registrant’s common stock, $0.01 par value
per share, as of February 21, 2008 was 28,806,022.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the proxy statement for the 2008 Annual Meeting of Shareholders are
incorporated by reference into Part III of this report.
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Table
of Contents
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Forward
Air Corporation
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Page
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Number
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Part
I.
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Item
1.
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3
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Item
1A.
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12
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Item
1B.
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16
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Item
2.
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16
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Item
3.
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16
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Item
4.
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16
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Part
II.
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Item
5.
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18
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Item
6.
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21
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Item
7.
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22
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Item
7A.
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39
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Item
8.
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39
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Item
9.
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39
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Item
9A.
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39
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Item
9B.
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41
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Part
III.
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Item
10.
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41
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Item
11.
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41
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Item
12.
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41
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Item
13.
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41
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Item
14.
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41
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Part
IV.
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Item
15.
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41
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42
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F-2
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S-1
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2
Introductory
Note
This
Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (the
“Form 10-K”) contains “forward-looking statements,” as defined in Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements are statements other than historical information or
statements of current condition and relate to future events or our future
financial performance. Some forward-looking statements may be identified by use
of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,”
“projects” or “expects.” Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. The following is a list of factors, among others,
that could cause actual results to differ materially from those contemplated by
the forward-looking statements: economic factors such as recessions, inflation,
higher interest rates and downturns in customer business cycles, our inability
to maintain our historical growth rate because of a decreased volume of freight
moving through our network or decreased average revenue per pound of freight
moving through our network, increasing competition and pricing pressure, surplus
inventories, loss of a major customer, the creditworthiness of our customers and
their ability to pay for services rendered, our ability to secure terminal
facilities in desirable locations at reasonable rates, the inability of our
information systems to handle an increased volume of freight moving through our
network, changes in fuel prices, claims for property damage, personal injuries
or workers’ compensation, employment matters including rising health care costs,
enforcement of and changes in governmental regulations, environmental and tax
matters, the handling of hazardous materials, the availability and compensation
of qualified independent owner-operators and freight handlers needed to serve
our transportation needs and our inability to successfully integrate
acquisitions. As a result of the foregoing, no assurance can be given as to
future financial condition, cash flows or results of operations. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Part
I
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Item 1.
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We were
formed as a corporation under the laws of the state of Tennessee on October 23,
1981. We are a leading provider of time-definite surface transportation and
related logistics services to the North American deferred air freight market.
Through our airport-to-airport network we offer our customers scheduled surface
transportation of cargo as a cost effective, reliable alternative to air
transportation. We transport cargo that must be delivered at a specific time,
but is less time-sensitive than traditional air freight. This type of cargo is
frequently referred to in the transportation industry as deferred air
freight. We also offer our customers an array of logistics and
other services including: expedited truckload (TLX); pool distribution;
dedicated fleets; local pick-up and delivery; warehousing; customs brokerage;
and shipment consolidation, deconsolidation and handling. These
services are critical to our customers, that do not provide these logistics
services themselves or that prefer to use one provider for all of their surface
transportation needs.
We
operate the airport to airport network through terminals located in 85 cities on
or near airports in the United States and Canada, including a central sorting
facility in Columbus, Ohio and ten regional hubs serving key markets. A
typical shipment through this network consists of a pallet-load of freight,
often consisting of electronics, telecommunications equipment, machine parts,
trade show exhibit materials or medical equipment. During 2007, our average
shipment weighed approximately 720 pounds. We utilize a flexible source of
capacity made up of owner-operators and, to a lesser extent, other surface
transportation providers, which results in a largely variable cost operating
model with low capital requirements.
We market
our airport-to-airport services primarily to air freight forwarders, integrated
air cargo carriers, and passenger and cargo airlines. To serve this market, we
offer customers a very high level of service with a focus on on-time,
damage-free deliveries. We serve our customers by locating terminals on or near
airports and maintaining regularly scheduled transportation service between
major cities. We either receive shipments at our terminals or pick up shipments
directly from our customers and transport them by truck (i) directly to the
destination terminal; (ii) to our Columbus, Ohio central sorting facility; or
(iii) to one of our ten regional hubs, where they are unloaded, sorted and
reloaded. After reloading the shipments, we deliver them to the terminals
nearest their destinations and then, if requested by the customer, on to a final
designated site. We ship freight directly between terminals when
justified by the volume of shipments. During 2007, approximately 21.0% of the
freight we handled was for overnight delivery, approximately 60.7% was for
delivery within two to three days and the balance was for delivery in four or
more days. We generally do not market our airport-to-airport services directly
to shippers (where such services might compete with our freight forwarder
customers). Also, because we do not place significant size or weight
restrictions on airport-to airport shipments, we generally do not compete
directly with integrated air cargo carriers such as United Parcel Service,
Federal Express and DHL Worldwide in the overnight delivery of small parcels. In
2007, our five largest customers accounted for approximately 21.8% of our
operating revenue and no single customer accounted for more than 10.0% of our
operating revenue.
3
Through
our strategic initiative “Completing the Model” we continue to develop and
implement complimentary services to the airport-to-airport
network. Other complimentary services including expedited truckload
(TLX); dedicated fleets; local pick-up and delivery; warehousing; customs
brokerage; and shipment consolidation, deconsolidation and handling are
critical to helping meet the changing needs of our customers and for efficiently
using the people and resources of our airport-to-airport network.
In addition to
these complimentary services, with the July 2007 acquisition of USA Carriers,
Inc. (“USAC”) we began pool distribution services throughout the Southeast,
Midwest and Southwest continental United States. Pool
distribution involves the consolidation and shipment of several smaller
less-than-truckload shipments to a common area or region. Once at the
regional destination, the consolidated loads are then deconsolidated and
delivered to their unique destinations. Our primary customers for
this product are regional and nationwide distributors and
retailers. We service these customers through an eleven terminal
network.
Our
Industry
As
businesses minimize inventory levels, perform manufacturing and assembly
operations in multiple locations and distribute their products through multiple
channels, they have an increased need for expedited delivery services. Expedited
shipments are those shipments for which the customer requires delivery the next
day or within two to three days, usually by a specified time or within a
specified time window. The Colography Group, Inc., an independent industry
market research and consulting firm, estimates that the total U.S. expedited
cargo market, including domestic air, domestic ground parcel, domestic
less-than-truckload and U.S. air export will generate $107.6 billion in revenue
in 2008. Also according to The Colography Group, Inc., the U.S. domestic air
freight market accounts for approximately $37.5 billion, or 34.9%, of this
market. Approximately 14.1%, of that market is made up of heavyweight overnight
and deferred air freight, which is the portion of the market within which we
primarily compete.
Shippers
with expedited delivery requirements have four principal alternatives to
transport freight: freight forwarders; integrated air cargo carriers;
less-than-truckload carriers; and passenger and cargo airlines.
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•
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Freight forwarders obtain
requests for shipments from customers, make arrangements for
transportation of the cargo by a third-party carrier and usually arrange
for both delivery from the shipper to the carrier and from the carrier to
the recipient.
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•
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Integrated air cargo carriers
provide pick-up and delivery services primarily using their own fleet of
trucks and provide transportation services generally using their own fleet
of aircraft.
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•
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Less-than-truckload carriers also
provide pick-up and delivery services through their own fleet of trucks.
These carriers operate terminals where freight is unloaded, sorted and
reloaded multiple times in a single shipment. This additional handling
increases transit time, handling costs and the likelihood of cargo
damage.
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•
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Passenger or cargo airlines
provide airport-to-airport service, but have limited cargo space and
generally accept only shipments weighing less than 150
pounds.
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Although
expedited air freight is usually transported by aircraft, freight forwarders
often elect to arrange for its transportation by truck, especially
for shipments requiring deferred delivery. Generally, the cost of shipping
freight, especially heavy freight, by truck is substantially less than shipping
by aircraft. We believe there are several trends that are increasing demand for
lower-cost truck transportation of expedited air freight. These trends
include:
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•
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Increased
Outsourcing of Logistics Management to Third-Party Logistics
Providers. Air
freight forwarders are playing an increasingly important role in logistics
management. As the growing emphasis on just-in-time processes has added to
the complexity of logistics management, companies are finding it more
advantageous to outsource their logistics management functions to third
parties. According to the Council of Supply Chain Management
Professionals, the United States’ third-party logistics market grew at a
compound annual rate of approximately 17.1% between 1995 and 2005. In
contrast to integrated air cargo carriers and less-than-truckload carriers
that are focused on utilizing their own fixed-cost assets, air freight
forwarders can select from various transportation modes and suppliers to
meet their customers’ shipping requirements, thereby serving their
customers less expensively. In addition, air freight forwarders generally
handle shipments of any size and offer customized shipping options, unlike
most integrated air cargo carriers and less-than-truckload
carriers.
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•
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Integrated
Air Cargo Carriers’ Focus on Overnight Freight. Integrated air cargo carriers
that transport heavy freight are targeting their marketing efforts at
higher yielding overnight freight in order to better utilize their high
fixed-cost infrastructures. As a result, these carriers are outsourcing
deferred freight to surface transportation providers like
us.
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•
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Reduced
Airline Cargo Capacity. Since the 1980’s, when the
domestic airlines eliminated many of their all-cargo aircraft, growth in
demand for air cargo services has generally outpaced the growth of
aircraft cargo capacity. Airlines have decreased fleet sizes and are
utilizing smaller aircraft, including more regional jets, in many markets.
The short supply of air cargo space has resulted in increased demand for
surface transportation of
cargo.
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4
Competitive
Advantages
We
believe that the following competitive advantages are critical to our success as
a leading provider of time-definite surface transportation services and related
logistics services to the deferred air freight market in North
America:
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•
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Focus on the
Deferred Air Freight Market. We focus on providing
time-definite surface transportation and related logistics services to the
deferred air cargo industry. We believe that our focused approach has
enabled us to provide a higher level of service in a more cost-effective
manner than our competitors.
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•
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Expansive
Network of Terminals and Sorting Facilities. We have built a network of
terminals and sorting facilities throughout the United States and Canada
located on or near airports. We believe it would be difficult for a
competitor to duplicate our network without the expertise and strategic
facility locations we have acquired and without expending significant
capital and management resources. Our network enables us to provide
regularly scheduled service between most markets with low levels of
freight damage or loss, all at rates generally significantly below air
freight rates.
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•
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Concentrated
Marketing Strategy. We provide our deferred air
freight services mainly to air freight forwarders, integrated air cargo
carriers, and passenger and cargo airlines rather than directly serving
shippers. We do not place significant size or weight restrictions on
shipments and, therefore, we do not compete with delivery services such as
United Parcel Service, Federal Express and DHL Worldwide in the overnight
small parcel market. We believe that our customers prefer to purchase
their transportation services from us because, among other reasons, we
generally do not market our services to their shipper customers and,
therefore, do not compete directly with them for
customers.
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•
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Superior
Service Offerings. Our published deferred air
freight schedule for transit times with specific cut-off and arrival times
generally provides our customers with the predictability they need. In
addition, our network of terminals allows us to offer our customers later
cut-off times, a higher percentage of direct shipments (which reduces
damage and lost time caused by additional sorting and reloading) and
shorter delivery times than most of our
competitors.
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•
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Flexible
Business Model. Rather than owning and operating
our own trucks, we purchase most of our transportation requirements from
owner-operators or truckload carriers. This allows us to respond quickly
to changing demands and opportunities in our industry and to generate
higher returns on assets because of our low capital
requirements.
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•
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Comprehensive Logistic and
Other Service Offerings. We offer an array of logistic and
other services including: expedited truckload (TLX), pick up and
delivery (Forward Air Complete™), dedicated fleet, warehousing, customs
brokerage and shipment consolidation and handling. These services are
an essential part of many of our customers’ transportation needs
and are not offered by many of our competitors. We are able to
provide these services utilizing our existing infrastructure and thereby
are able to earn additional revenue without incurring significant
additional fixed costs.
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•
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Pool distribution
services. During 2007, in conjunction with our acquisition of USAC,
we launched our pool distribution service. This new business
allows us to provide a new service offering to new and existing customers
as well as provides additional opportunities for us to add density to our
existing airport-to-airport
network.
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•
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Leading
Technology Platform. We are committed to using
information technology to increase the volume of freight we can handle in
our network, improve visibility of shipment information and reduce our
operating costs. Our technology allows us to provide our customers with
electronic bookings and real-time tracking and tracing of shipments while
in our network, complete shipment history, proof of delivery, estimated
charges and electronic bill presentment. We continue to enhance our
systems to permit us and our customers to access vital information through
both the Internet and electronic data interchange. We continue
to invest in information technology to the benefit of our customers and
our business processes. The primary example of this development is our
Terminal Automation Program (“TAP”), a wireless application for all our
terminals. The system enables individual operators to perform virtually
all data entry from our terminal floor locations. The system provides
immediate shipment updates, resulting in increased shipment accuracy and
improved data timeliness. The TAP system not only reduces operational
manpower, but also improves our on-time performance. Additionally, in
order to support our Forward Air Complete service offering, we developed
and installed a web-based system, which coordinates activities between our
customers, operations personnel and external service
providers.
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5
Growth
Strategy
Our
growth strategy is to take advantage of our competitive strengths in the
deferred air freight market in order to increase our profits and shareholder
returns. Our “Completing the Model” strategic initiative is designed to
facilitate this overall strategy. The goal of this initiative is to
use our airport-to-airport network as the base for which to expand and launch
new services that will allow us to grow in any economic
environment. Principal components of our “Completing the Model”
strategy include efforts to:
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•
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Increase
Freight Volume from Existing Customers. Many of our customers currently
use us for only a portion of their overall transportation needs. In
addition, many of our air freight forwarder customers are growing rapidly,
and we expect that they will have a greater need for our services as their
businesses grow. We will continue to market directly to these customers to
capture additional freight volume. We also believe that there is
significant potential for increased freight volume from passenger and
cargo airlines, as well as from the integrated air cargo
carriers.
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•
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Develop New
Customers. We
continue to actively market our services to potential new customers, such
as international freight forwarders. We believe air freight forwarders may
move away from integrated air cargo carriers because those carriers charge
higher rates, and away from less-than-truckload carriers because those
carriers provide less reliable service and compete for the same customers
as do the air freight forwarders In addition, we believe our
comprehensive North American network and related logistics services are
attractive to domestic and international airlines. In 2006, we
introduced Forward Air Complete, our pick-up and delivery service, to help
attract business from new and existing customers who require pick-up and
delivery for their
shipments.
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•
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Improve
Efficiency of Our Transportation Network. We constantly seek to improve
the efficiency of our airport-to-airport network. Regional hubs and direct
shuttles improve our efficiency by reducing the number of miles freight
must be transported and reducing the number of times freight must be
handled and sorted. As the volume of freight between key markets
increases, we intend to continue to add direct shuttles. In 2007, we
completed the purchase of two new facilities in Chicago, Illinois and
Atlanta, Georgia and purchased land and began construction on a new
regional terminal in Dallas/Fort Worth, Texas. Also, in 2006 we
completed the expansion of our national hub in Columbus, Ohio. With
these new and expanded facilities, we believe we will have the necessary
space to grow our business in key gateway cities and to offer the
additional services required by our “Completing the Model”
strategy.
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•
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Expand Logistics and
Other Services. We continue to expand our logistics and other
services to increase revenue and improve utilization of our terminal
facilities and labor force. Because of the timing of the arrival and
departure of cargo, our facilities are underutilized during certain
portions of the day, allowing us to add logistics services without
significantly increasing our costs. Therefore, we have added a number of
services in the past few years, such as expedited truckload services,
dedicated fleet, warehousing, customs brokerage and shipment consolidation
and handling services. These services directly benefit our existing
customers and increase our ability to attract new customers, particularly
those air freight forwarders that cannot justify providing the services
directly. These services are not offered by many transportation providers
with whom we compete and are attractive to customers who prefer to use one
provider for all of their transportation
needs.
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•
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Offer pool distribution
services. During 2007, our newly-formed subsidiary Forward Air
Solutions, Inc. acquired certain assets and liabilities
of USAC. Through this acquisition, we now provide pool
distribution services. Pool distribution involves the
consolidation and shipment of several smaller less-than-truckload
shipments to a common area or region. Once at the regional
destination, the consolidated loads are then deconsolidated and delivered
to their unique destinations. Pool distribution is a new
service offering that we can offer to new and existing customers, which
provides an important platform that will enable us to add density to our
existing airport-to-airport network and further expand our Forward Air
Complete, expedited truckload, and value-added handling
services.
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•
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Enhance
Information Systems. We are committed to the
continued enhancement of our information systems in ways that will
continue to provide us competitive service advantages and increased
productivity. We believe our enhanced systems assist us in capitalizing on
new business opportunities with existing customers and developing
relationships with new customers because of the customer-friendly,
cost-saving features our systems provide, including our real-time
tracking and tracing of shipments and electronic bill
presentment.
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•
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Pursue Strategic
Acquisitions. We intend to continue to evaluate acquisitions that
can increase our penetration of a geographic area, add new customers,
increase freight volume and add new service offerings. In
addition, we expect to explore acquisitions that may enable us to offer
additional services. During 2007, we acquired certain assets
and liabilities of two companies that met these criteria. In
July 2007 we acquired certain assets and liabilities of USAC which has
enabled us to offer pool distribution services. Then in
December 2007 we acquired certain assets and liabilities of Black Hawk
Freight Services, Inc. (“Black Hawk”) which increased the penetration
of the airport-to-airport network in the Midwest. Since our inception, we
have acquired certain assets and liabilities of ten businesses that
met one or more of these criteria.
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6
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Operations
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We
operate in two reportable segments, based on differences in the services
provided: Forward Air, Inc. (Forward Air) and Forward Air Solutions,
Inc. (FASI).
Through
Forward Air we are a leading provider of time-definite transportation and
related logistics services to the North American deferred air freight market and
its activities can be broadly classified into three categories of
services. Forward Air’s airport-to-airport service operates a
comprehensive national network for the time-definite surface transportation of
deferred air freight. The airport-to-airport service offers customers
local pick-up and delivery and scheduled surface transportation of cargo as a
cost effective, reliable alternative to air transportation. Forward
Air’s logistics service provides expedited truckload brokerage and dedicated
fleet services. Forward Air’s other services include shipment
consolidation and deconsolidation, warehousing, customs brokerage, and other
handling. The Forward Air segment primarily provides its
transportation services through a network of terminals located at or near
airports in the United States and Canada. Forward Air’s primary
customers are air freight forwarders, integrated air cargo carriers and
passenger and cargo airlines.
FASI was
formed in July 2007 in conjunction with our acquisition of certain assets and
liabilities of USAC. FASI provides pool distribution services
throughout the Southeast, Midwest and Southwest continental United
States. Pool distribution involves the consolidation and shipment of
several smaller less-than-truckload shipments to a common area or
region. Once at the regional destination, the consolidated loads are
then deconsolidated and delivered to their unique
destinations. FASI’s primary customers are national and regional
retailers and distributors.
Forward
Air
Airport-to-airport
We
receive freight from air freight forwarders, integrated air cargo carriers and
passenger and cargo airlines at our terminals, which are located on or near
airports in the United States and Canada. We also pick up freight from customers
at designated locations via our Forward Air Complete service. We consolidate and
transport these shipments by truck through our network to our terminals nearest
the ultimate destinations of the shipments. We operate regularly scheduled
service to and from each of our terminals through our Columbus, Ohio central
sorting facility or through one of our ten regional hubs. We also operate
regularly scheduled shuttle service directly between terminals where the volume
of freight warrants bypassing the Columbus, Ohio central sorting facility or a
regional hub. When a shipment arrives at our terminal nearest its destination,
the customer arranges for the shipment to be picked up and delivered to its
final destination. Through our Forward Air Complete service, we will also
deliver the freight for the customer to its final destination.
7
Terminals
Our airport-to-airport network
consists of terminals located in the following 85 cities:
|
City
|
Airport
Served
|
City
|
Airport
Served
|
|
|
Albany,
NY
|
ALB
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Los
Angeles, CA
|
LAX
|
|
|
Albuquerque,
NM
|
ABQ
|
Louisville,
KY
|
SDF
|
|
|
Atlanta,
GA
|
ATL
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Memphis,
TN
|
MEM
|
|
|
Austin,
TX
|
AUS
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McAllen,
TX*
|
MFE
|
|
|
Baltimore,
MD
|
BWI
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Miami,
FL
|
MIA
|
|
|
Baton
Rouge, LA*
|
BTR
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Milwaukee,
WI
|
MKE
|
|
|
Birmingham,
AL*
|
BHM
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Minneapolis,
MN
|
MSP
|
|
|
Blountville,
TN*
|
TRI
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Mobile,
AL*
|
MOB
|
|
|
Boston,
MA
|
BOS
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Moline,
IA
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MLI
|
|
|
Brownsville,
TX*
|
BRO
|
Nashville,
TN
|
BNA
|
|
|
Buffalo,
NY
|
BUF
|
Newark,
NJ
|
EWR
|
|
|
Burlington,
IA
|
BRL
|
Newburgh,
NY
|
SWF
|
|
|
Cedar
Rapids, IA
|
CID
|
New
Orleans, LA
|
MSY
|
|
|
Charleston,
SC
|
CHS
|
New
York, NY
|
JFK
|
|
|
Charlotte,
NC
|
CLT
|
Norfolk,
VA
|
ORF
|
|
|
Chicago,
IL
|
ORD
|
Oklahoma
City, OK
|
OKC
|
|
|
Cincinnati,
OH
|
CVG
|
Omaha,
NE
|
OMA
|
|
|
Cleveland,
OH
|
CLE
|
Orlando,
FL
|
MCO
|
|
|
Columbia,
SC*
|
CAE
|
Pensacola,
FL*
|
PNS
|
|
|
Columbus,
OH
|
CMH
|
Philadelphia,
PA
|
PHL
|
|
|
Corpus
Christi, TX*
|
CRP
|
Phoenix,
AZ
|
PHX
|
|
|
Dallas/Ft.
Worth, TX
|
DFW
|
Pittsburgh,
PA
|
PIT
|
|
|
Dayton,
OH*
|
DAY
|
Portland,
OR
|
PDX
|
|
|
Denver,
CO
|
DEN
|
Raleigh,
NC
|
RDU
|
|
|
Des
Moines, IA
|
DSM
|
Richmond,
VA
|
RIC
|
|
|
Detroit,
MI
|
DTW
|
Rochester,
NY
|
ROC
|
|
|
El
Paso, TX
|
ELP
|
Sacramento,
CA
|
SMF
|
|
|
Greensboro,
NC
|
GSO
|
Salt
Lake City, UT
|
SLC
|
|
|
Greenville,
SC
|
GSP
|
San
Antonio, TX
|
SAT
|
|
|
Hartford,
CT
|
BDL
|
San
Diego, CA
|
SAN
|
|
|
Harlingen,
TX*
|
HRL
|
San
Francisco, CA
|
SFO
|
|
|
Harrisburg,
PA
|
MDT
|
Seattle,
WA
|
SEA
|
|
|
Houston,
TX
|
IAH
|
St.
Louis, MO
|
STL
|
|
|
Huntsville,
AL*
|
HSV
|
Syracuse,
NY
|
SYR
|
|
|
Indianapolis,
IN
|
IND
|
Tampa,
FL
|
TPA
|
|
|
Jackson,
MS*
|
JAN
|
Toledo,
OH*
|
TOL
|
|
|
Jacksonville,
FL
|
JAX
|
Tucson,
AZ*
|
TUS
|
|
|
Kansas
City, MO
|
MCI
|
Tulsa,
OK
|
TUL
|
|
|
Knoxville,
TN*
|
TYS
|
Washington,
DC
|
IAD
|
|
|
Lafayette,
LA*
|
LFT
|
Montreal,
Canada*
|
YUL
|
|
|
Laredo,
TX*
|
LRD
|
Ottawa,
Canada*
|
YOW
|
|
|
Las
Vegas, NV
|
LAS
|
Toronto,
Canada
|
YYZ
|
|
|
Little
Rock, AR
|
LIT
|
|||
* Denotes an independent agent
location.
Independent agents operate 20
of our locations. These locations typically handle lower volumes of freight
relative to our company-operated facilities.
8
Direct
Service and Regional Hubs
We
operate direct terminal-to-terminal services and regional overnight service
between terminals where justified by freight volumes. We currently provide
regional overnight service to many of the markets within our network. Direct
service allows us to provide quicker scheduled service at a lower cost because
it allows us to minimize out-of-route miles and eliminate the added time and
cost of handling the freight at our central or regional hub sorting facilities.
Direct shipments also reduce the likelihood of damage because of reduced
handling and sorting of the freight. As we continue to increase volume between
various terminals, we intend to add other direct services. Where warranted by
sufficient volume in a region, we utilize larger terminals as regional sorting
hubs, which allows us to bypass our Columbus, Ohio central sorting facility.
These regional hubs improve our operating efficiency and enhance customer
service. We operate regional hubs in Atlanta, Charlotte, Dallas/Ft. Worth,
Kansas City, Los Angeles, New Orleans, Newburgh, Orlando and San
Francisco. In January 2008, we began operating a regional sorting
center in our Chicago facility.
Shipments
The
average weekly volume of freight moving through our network
was approximately 32.8 million pounds per week in 2007. During 2007,
our average shipment weighed approximately 720 pounds and shipment sizes
ranged from small boxes weighing only a few pounds to large shipments of several
thousand pounds. Although we impose no significant size or weight restrictions,
we focus our marketing and price structure on shipments of 200 pounds or more.
As a result, we typically do not directly compete with integrated air cargo
carriers in the overnight delivery of small parcels. The table below summarizes
the average weekly volume of freight moving through our network for each year
since 1990.
|
Year
|
Average Weekly Volume in
Pounds
|
|
(In
millions)
|
|
|
1990
|
1.2
|
|
1991
|
1.4
|
|
1992
|
2.3
|
|
1993
|
3.8
|
|
1994
|
7.4
|
|
1995
|
8.5
|
|
1996
|
10.5
|
|
1997
|
12.4
|
|
1998
|
15.4
|
|
1999
|
19.4
|
|
2000
|
24.0
|
|
2001
|
24.3
|
|
2002
|
24.5
|
|
2003
|
25.3
|
|
2004
|
28.7
|
|
2005
|
31.2
|
|
2006
|
32.2
|
|
2007
|
32.8
|
Logistics
and Other Services
Customers
increasingly demand more than the movement of freight from their transportation
providers. To meet these demands, we continually seek ways to customize our
logistics services and add new services. Logistics and other services increase
our profit margins by increasing our revenue without corresponding increases in
our fixed costs, as airport-to-airport assets and resources are largely used to
provide the logistics and other services.
Our
logistics and other services allow customers to access the following
services from a single source:
|
|
•
|
expedited truckload brokerage, or
TLX;
|
|
|
•
|
dedicated
fleets;
|
|
|
•
|
customs brokerage, such as
assistance with U.S. Customs and Border Protection (“U.S. Customs”)
procedures for both import and export
shipments;
|
|
|
•
|
warehousing, dock and office
space; and
|
|
|
•
|
shipment
consolidation and handling, such as shipment build-up and break-down and
reconsolidation of air or ocean pallets or
containers.
|
9
These services are critical to many of
our air freight forwarder customers that do not provide logistics services
themselves or that prefer to use one provider for all of their surface
transportation needs.
Revenue
and purchased transportation for our TLX and dedicated fleet services are
largely determined by the number of miles driven. The table below
summarizes the average miles driven per week to support our logistics services
since 2003:
|
|
Average
Weekly
|
|||
|
Year
|
Miles
(In Thousands)
|
|||
|
2003
|
211 | |||
|
2004
|
259 | |||
|
2005
|
248 | |||
|
2006
|
331 | |||
|
2007
|
529 | |||
Forward
Air Solutions
Pool
Distribution
Pool
distribution involves the consolidation and shipment of several smaller less
than truckload shipments to a common area or region. Once at the
regional destination, the consolidated loads are then deconsolidated and
delivered to their unique destinations. Our pool distribution network
consists of separate terminals located in the following 11 cities:
|
City
|
|
Albuquerque,
NM
|
|
Dallas/Ft.
Worth, TX
|
|
Denver,
CO
|
|
Des
Moines, IA
|
|
Greensboro,
NC
|
|
Jacksonville,
FL
|
|
Kansas
City, MO
|
|
Lakeland,
FL
|
|
Miami,
FL
|
|
Nashville,
TN
|
|
Tulsa,
OK
|
Customers
and Marketing
Our
Forward Air wholesale customer base is primarily comprised of air freight
forwarders, integrated air cargo carriers and passenger and cargo airlines. Our
air freight forwarder customers vary in size from small, independent, single
facility companies to large, international logistics companies such as SEKO
Worldwide, AIT Worldwide Logistics, DHL Danzas, UPS Supply Chain Solutions and
Pilot Air Freight. Because we deliver dependable service, integrated air cargo
carriers such as UPS Cargo and DHL Worldwide Express use our network to provide
overflow capacity and other services, including shipment of bigger packages and
pallet-loaded cargo. Our passenger and cargo airline customers include British
Airways, United Airlines and Virgin Atlantic. Our FASI pool
distribution customers are primarily comprised of national and regional
retailers and distributors, such as The Limited, GAP and
Blockbuster.
We market
our services through a sales and marketing staff located in major markets of the
United States. Senior management also is actively involved in sales and
marketing at the national account level and supports local sales initiatives. We
have a strong commitment to strategically supporting the wholesale air cargo
industry and focus on air freight forwarders, integrated air cargo carriers and
passenger and cargo airlines that have time-sensitive shipping needs requiring
customized services. We also participate in air cargo and retail trade shows and
advertise our services through direct mail programs and through the Internet via
www.forwardair.com. The information contained on our website is not part of this
filing.
Technology
and Information Systems
Our
technology allows us to provide our customers with real-time tracking and
tracing of shipments throughout the transportation process, complete shipment
history, proof of delivery, estimated charges and electronic bill presentment.
In addition,
our customers are able to electronically transmit bookings to us from their own
networks and schedule transportation and obtain tracking and tracing
information. We continue to enhance our systems to permit our customers to
obtain this information both through the Internet and
10
through
electronic data interchange. We have invested and expect to continue investing
management and financial resources on maintaining and upgrading our information
systems in an effort to increase the volume of freight we can handle in our
network, improve the visibility of shipment information and reduce our operating
costs. The ability to provide accurate,
real-time information on the status of shipments is increasingly
important and our efforts in this area could result in both competitive
service advantages and increased productivity throughout our network. We believe
our continuing technical enhancements will assist us in capitalizing on new
business opportunities, capturing additional freight from existing customers,
and attracting new customers.
We
continue to enhance our TAP application and website service offerings in our
continuing effort to automate and improve operations. TAP enables operation
personnel to perform data entry from our terminal floor locations. This greatly
reduces the need for data entry personnel and provides immediate shipment
updates. The result is increased shipment accuracy and improved data timeliness.
The TAP system improves our ability to provide accurate, real-time information,
and results in both competitive service advantages and increased productivity
throughout our network. Our Forward Air Complete website coordinates activities
between our customers, operations personnel and external service providers. We
believe that the TAP system, Forward Air Complete website and other
technical enhancements will assist us in capitalizing on new
business opportunities and could encourage customers to increase the volume of
freight they send through our network.
Purchased
Transportation
We
contract for most of our transportation services on a per mile basis from
owner-operators. The owner-operators own, operate and maintain their own
tractors and employ their own drivers. Our freight handlers load and unload our
trailers for hauling by owner-operators between our terminals.
We seek
to establish long-term relationships with owner-operators to assure dependable
service and availability. Historically, we have experienced significantly higher
than industry average retention of owner-operators. We have established specific
guidelines relating to safety records, driving experience and personal
evaluations that we use to select our owner-operators. To enhance our
relationship with the owner-operators, our per mile rates are generally above
prevailing market rates. In addition, we typically offer our owner-operators and
their drivers a consistent work schedule. Usually, schedules are between the
same two cities, improving quality of work life for the owner-operators and
their drivers and, in turn, increasing driver retention.
As a
result of efforts to expand our logistics and other services, seasonal demands
and volume surges in particular markets, we also purchase transportation from
other surface transportation providers to handle overflow volume. Of the $164.4
million incurred for purchased transportation during 2007, we purchased 64.8%
from owner-operators and 35.2% from other surface transportation
providers.
Competition
The air
freight and pool distribution transportation industries are highly competitive
and very fragmented. Our competitors include regional trucking companies that
specialize in handling deferred air freight and national and regional
less-than-truckload carriers. To a lesser extent, we compete with integrated air
cargo carriers and passenger and cargo airlines. We believe competition is based
on service, primarily on-time delivery, flexibility and reliability, as well as
rates. We offer our services at rates that generally are significantly below the
charge to transport the same shipment to the same destination by air. We believe
we have an advantage over less-than-truckload carriers because we deliver
faster, more reliable service between many cities.
Seasonality
Historically,
our operating results have been subject to seasonal trends when measured on a
quarterly basis. The first quarter has traditionally been the weakest and the
third and fourth quarters have traditionally been the strongest. Typically, this
pattern has been the result of factors such as climate, national holidays,
customer demand and economic conditions. Additionally, a significant portion of
our revenue is derived from customers whose business levels are impacted by the
economy. The impact of seasonal trends is more pronounced on our pool
distribution business. First and second quarters are traditionally
the weakest; third quarter, and most acutely fourth quarter, are
traditionally the strongest.
Employees
As of
December 31, 2007, we had 1,709 full-time employees, 551 of whom were
freight handlers. Additionally as of that date, there were 928 part-time
employees, of whom the majority were freight handlers. None of our employees are
covered by a collective bargaining agreement. We recognize that our workforce,
including our freight handlers, is one of our most valuable assets. The
recruitment, training and retention of qualified employees are essential to
support our continued growth and to meet the service requirements of our
customers.
11
Risk
Management and Litigation
Under
U.S. Department of Transportation (“DOT”) regulations, we are liable for
property damage and personal injuries caused by owner-operators while they are
operating on our behalf.
We currently maintain liability insurance coverage that we believe is adequate
to cover third-party claims. We have a self-insured retention of $0.5 million
per occurrence for each vehicle and
general liability claim. We may also be subject to claims for workers’
compensation. We maintain workers’ compensation insurance
coverage that we believe is adequate to cover such claims. We have a
self-insured retention of approximately $0.3 million for each such claim, except
in Ohio, where we are a qualified self-insured entity with an
approximately $0.4 million self-insured retention. We could incur claims in
excess of our policy limits or incur claims not covered by our
insurance.
From time
to time, we are a party to litigation arising in the normal course of our
business, most of which involve claims for personal injury, property damage
related to the transportation and handling of freight, or workers’ compensation.
We do not believe that any of these pending actions, individually or in the
aggregate, will have a materially adverse effect on our business, financial
condition or results of operations.
Regulation
The DOT
and various state agencies have been granted broad powers over our business.
These entities generally regulate such activities as authorization to engage in
property brokerage and motor carrier operations, safety and financial reporting.
We are licensed through our subsidiaries by the DOT as a motor carrier and as a
broker to arrange for the transportation of freight by truck. Our domestic
customs brokerage operations are licensed by U.S. Customs. We are subject to
similar regulation in the Dominion of Canada.
Service
Marks
Through
one of our subsidiaries, we hold federal trademark registrations or
applications for federal trademark registration, associated with the
following service marks: Forward Air, Inc.® ,
North America’s Most Complete Roadfeeder Network®, Forward
Air ™, Forward
Air SolutionsSM, and
Forward Air Complete™. These marks are of significant value
to our business.
Website
Access
We file
reports with the Securities and Exchange Commission (the “SEC”), including
annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports
from time to time. We are an electronic filer and the SEC maintains an Internet
site at www.sec.gov that contains these reports and other information filed
electronically. We make available free of charge through our website our Code of
Ethics and our reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Our website address is
www.forwardair.com. Please note that this website address is provided as an
inactive textual reference only. The information provided on the website is not
part of this report, and is therefore not incorporated by reference unless such
information is otherwise specifically referenced elsewhere in this
report.
|
Item 1A.
|
In
addition to the other information in this Form 10-K and other documents we have
filed with the SEC from time to time, the following factors should be carefully
considered in evaluating our business. Such factors could affect results and
cause results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, us. Some or all of these factors may apply
to our business.
Our
business is subject to general economic and business factors that are largely
out of our control, any of which could have a materially adverse effect on our
results of operations.
Our
business is dependent upon a number of factors that may have a materially
adverse effect on the results of our operations, many of which are beyond our
control. These factors include increases or rapid fluctuations in fuel prices,
capacity in the trucking industry, insurance premiums, self-insured retention
levels and difficulty in attracting and retaining qualified owner-operators and
freight handlers. Our profitability would decline if we were unable to
anticipate and react to increases in our operating costs, including purchased
transportation and labor, or decreases in the amount of revenue per pound of
freight shipped through our system. As a result of competitive factors, we may
be unable to raise our prices to meet increases in our operating costs, which
could result in a materially adverse effect on our business, results of
operations and financial condition.
Economic
conditions may adversely affect our customers and the amount of freight
available for transport. This may require us to lower our rates, and this may
also result in lower volumes of freight flowing through our network. Customers
encountering adverse economic conditions represent a greater potential for loss,
and we may be required to increase our reserve for bad-debt losses.
Our
results of operations may be affected by seasonal factors. Volumes of freight
tend to be lower in the first quarter after the winter holiday season. In
addition, it is not possible to predict the short or long-term effects of any
geopolitical events on the economy or on customer confidence in the United
States, or their impact, if any, on our future results of
operations.
12
In
order to continue growth in our business, we will need to increase the volume
and revenue per pound of the freight shipped through our system.
Our
continued growth depends in significant part on our ability to increase the
amount and revenue per pound of the freight shipped through our network. The
amount of freight shipped through our network and our revenue per pound depend
on numerous factors, many of which are beyond our control, such as economic
conditions and our competitors’ pricing. Therefore, we cannot guarantee that the
amount of freight shipped or the revenue per pound we realize on that freight
will increase or even remain at current levels. If we fail to increase the
volume of the freight shipped through our network or the revenue per pound of
the freight shipped, we may be unable to maintain or increase our
profitability.
Because
a portion of our network costs are fixed, we will be adversely affected by any
decrease in the volume or revenue per pound of freight shipped through our
network.
Our
operations, particularly our network of hubs and terminals, represent
substantial fixed costs. As a result, any decline in the volume or revenue per
pound of freight we handle may have an adverse effect on our operating margin
and our results of operations. Typically, we do not have contracts with our
customers and we cannot guarantee that our current customers will continue to
utilize our services or that they will continue at the same levels. The actual
shippers of the freight moved through our network include various manufacturers
and distributors of electronics, telecommunications equipment, machine parts,
trade show exhibit materials and medical equipment. Adverse business conditions
affecting these shippers or adverse general economic conditions are likely to
cause a decline in the volume of freight shipped through our
network.
We
operate in a highly competitive and fragmented industry, and our business will
suffer if we are unable to adequately address downward pricing pressures and
other factors that may adversely affect our operations and
profitability.
The
freight transportation industry is highly competitive, very fragmented and
historically has had few barriers to entry. Our principal competitors include
regional trucking companies that specialize in handling deferred air freight and
national and regional less-than-truckload carriers. To a lesser extent, we
compete with integrated air cargo carriers and passenger airlines. Our
competition ranges from small operators that compete within a limited geographic
area to companies with substantially greater financial and other resources,
including greater freight capacity. We also face competition from air freight
forwarders who decide to establish their own networks to transport deferred air
freight. We believe competition is based on service, primarily on-time delivery,
flexibility and reliability, as well as rates. Many of our competitors
periodically reduce their rates to gain business, especially during times of
economic decline. In the past several years, several of our competitors have
reduced their rates to unusually low levels that we believe are unsustainable in
the long-term, but that may materially adversely affect our business in the
short-term. These competitors may cause a decrease in our volume of freight,
require us to lower the prices we charge for our services and adversely affect
both our growth prospects and profitability.
Claims
for property damage, personal injuries or workers’ compensation and related
expenses could significantly reduce our earnings.
Under DOT
regulations, we are liable for property damage and personal injuries caused by
owner-operators while they are operating on our behalf. We currently maintain
liability insurance coverage that we believe is adequate to cover third-party
claims. We have a self-insured retention of $0.5 million per occurrence for each
vehicle and general liability claim. We may also be subject to claims for
workers’ compensation. We maintain workers’ compensation insurance coverage that
we believe is adequate to cover such claims. We have a self-insured retention of
approximately $0.3 million for each such claim, except in Ohio, where we are a
qualified self-insured entity with an approximately $0.4 million self-insured
retention. We could incur claims in excess of our policy limits or incur claims
not covered by our insurance. Any claims beyond the limits or scope of our
insurance coverage may have a material adverse effect on us. Because we do not
carry “stop loss” insurance, a significant increase in the number of claims that
we must cover under our self-insurance retainage could adversely affect our
profitability. In addition, we may be unable to maintain insurance coverage at a
reasonable cost or in sufficient amounts or scope to protect us against
losses.
We
have grown and may grow, in part, through acquisitions, which involve various
risks, and we may not be able to identify or acquire companies consistent with
our growth strategy or successfully integrate acquired businesses into our
operations.
We have
grown through acquisitions and we intend to pursue opportunities to expand our
business by acquiring other companies in the future. Acquisitions involve risks,
including those relating to:
|
|
•
|
identification of appropriate
acquisition candidates;
|
|
|
•
|
negotiation
of acquisitions on favorable terms and
valuations;
|
|
|
•
|
integration of acquired
businesses and personnel;
|
13
|
|
•
|
implementation of proper business
and accounting controls;
|
|
|
•
|
ability
to obtain financing, on favorable terms or at
all;
|
|
|
•
|
diversion of management
attention;
|
|
|
•
|
retention of employees and
customers; and
|
|
|
•
|
unexpected
liabilities.
|
Acquisitions
also may affect our short-term cash flow and net income as we expend funds,
potentially increase indebtedness and incur additional expenses. If we are not
able to identify or acquire companies consistent with our growth strategy, or if
we fail to successfully integrate any acquired companies into our operations, we
may not achieve anticipated increases in revenue, cost savings and economies of
scale, and our operating results may actually decline.
We
may have difficulty effectively managing our growth, which could adversely
affect our results of operations.
Our
growth plans will place significant demands on our management and operating
personnel. Our ability to manage our future growth effectively will require us
to regularly enhance our operating and management information systems and to
continue to attract, retain, train, motivate and manage key employees. If we are
unable to manage our growth effectively, our business, results of operations and
financial condition may be adversely affected.
If
we fail to maintain and enhance our information technology systems, we may lose
orders and customers or incur costs beyond expectations.
We must
maintain and enhance our information technology systems to remain competitive
and effectively handle higher volumes of freight through our network. We expect
customers to continue to demand more sophisticated, fully integrated information
systems from their transportation providers. If we are unable to maintain and
enhance our information systems to handle our freight volumes and meet the
demands of our customers, our business and results of operations will be
adversely affected. If our information systems are unable to handle higher
freight volumes and increased logistics services, our service levels and
operating efficiency may decline. This may lead to a loss of customers and a
decline in the volume of freight we receive from customers.
Our
information technology systems are subject to risks that we cannot
control.
Our
information technology systems are dependent upon global communications
providers, web browsers, telephone systems and other aspects of the Internet
infrastructure that have experienced significant system failures and electrical
outages in the past. While we take measures to ensure our major systems have
redundant capabilities, our systems are susceptible to outages from fire,
floods, power loss, telecommunications failures, break-ins and similar events.
Despite our implementation of network security measures, our servers are
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering with our computer systems. The occurrence of any of these
events could disrupt or damage our information technology systems and inhibit
our internal operations, our ability to provide services to our customers and
the ability of our customers to access our information technology systems. This
may result in the loss of customers or a reduction in demand for our
services.
If
we have difficulty attracting and retaining owner-operators or freight handlers,
our results of operations could be adversely affected.
We depend
on owner-operators for most of our transportation needs. In 2007,
owner-operators provided 64.8% of our purchased transportation. Competition for
owner-operators is intense, and sometimes there are shortages of available
owner-operators. In addition, we need a large number of freight handlers to
operate our business efficiently. During periods of low unemployment in the
areas where our terminals are located, we may have difficulty hiring and
retaining a sufficient number of freight handlers. If we have difficulty
attracting and retaining enough qualified owner-operators or freight handlers,
we may be forced to increase wages and benefits, which would increase our
operating costs. This difficulty may also impede our ability to maintain our
delivery schedules, which could make our service less competitive and force us
to curtail our planned growth. If our labor costs increase, we may be unable to
offset the increased labor costs by increasing rates without adversely affecting
our business. As a result, our profitability may be reduced.
14
A
determination by regulators that our independent owner-operators are employees
rather than independent contractors could expose us to various liabilities and
additional costs.
At times,
the Internal Revenue Service, the Department of Labor and state authorities have
asserted that owner-operators are “employees,” rather than “independent
contractors.” One or
more governmental authorities may challenge our position that the
owner-operators we use are not our employees. A determination by regulators that
our independent owner-operators are employees rather than independent
contractors could expose us to various liabilities and additional costs
including, but not limited to, employment-related expenses such as workers’
compensation insurance coverage and reimbursement of work-related
expenses.
We
operate in a regulated industry, and increased costs of compliance with, or
liability for violation of, existing or future regulations could have a material
adverse effect on our business.
The DOT
and various state agencies have been granted broad regulatory powers over our
business, and we are licensed by the DOT and U.S. Customs. If we fail to comply
with any applicable regulations, our licenses may be revoked or we could be
subject to substantial fines or penalties and to civil and criminal
liability.
We are
also subject to various environmental laws and regulations dealing with the
handling of hazardous materials. Our operations involve the risks of fuel
spillage or seepage. If we are involved in a spill or other accident involving
hazardous substances, our business and operating results may be adversely
affected. Changes to current environmental laws or regulations may increase our
operating costs and adversely affect our results of operations.
The
transportation industry is subject to legislative and regulatory changes that
can affect the economics of our business by requiring changes in operating
practices or influencing the demand for, and the cost of providing,
transportation services. Heightened security concerns may continue to result in
increased regulations, including the implementation of various security
measures, checkpoints or travel restrictions on trucks.
In
addition, there may be changes in applicable federal or state tax or other laws
or interpretations of those laws. If this happens, we may incur additional
taxes, as well as higher workers’ compensation and employee benefit costs, and
possibly penalties and interest for prior periods. This could have an adverse
effect on our results of operations.
We
are dependent on our senior management team, and the loss of any such personnel
could materially and adversely affect our business.
Our
future performance depends, in significant part, upon the continued service of
our senior management team. We cannot be certain that we can retain these
employees. The loss of the services of one or more of these or other key
personnel could have a material adverse effect on our business, operating
results and financial condition. We must continue to develop and retain a core
group of management personnel and address issues of succession planning if we
are to realize our goal of growing our business. We cannot be certain that we
will be able to do so.
If
our employees were to unionize, our operating costs would likely
increase.
None of
our employees are currently represented by a collective bargaining agreement.
However, we have no assurance that our employees will not unionize in the
future, which could increase our operating costs and force us to alter our
operating methods. This could have a material adverse effect on our operating
results.
Our
shareholder rights plan, charter and bylaws and provisions of Tennessee law
could discourage or prevent a takeover that may be considered
favorable.
We have a
shareholder rights plan that may have the effect of discouraging unsolicited
takeover proposals. The rights issued under the shareholder rights plan would
cause substantial dilution to a person or group that attempts to acquire us on
terms not approved in advance by our Board of Directors. In addition, our
shareholder rights plan, charter and bylaws and provisions of Tennessee law may
discourage, delay or prevent a merger, acquisition or change in control that may
be considered favorable. These provisions could also discourage proxy contests
and make it more difficult for shareholders to elect directors and take other
corporate actions. Among other things, these provisions:
|
•
|
authorize us to issue preferred
stock, the terms of which may be determined at the sole discretion of our
Board of Directors and may adversely affect the voting or economic
rights of our shareholders;
and
|
|
•
|
establish advance notice
requirements for nominations for election to the Board of Directors and
for proposing matters that can be acted on by shareholders at a
meeting.
|
Our shareholder rights
plan, charter and bylaws and provisions of Tennessee law may discourage
transactions that otherwise could provide for the payment of a premium over
prevailing market prices for our common stock, $0.01 par value per share, and
also could limit the price that investors are willing to pay in the future for
shares of our common stock.
15
|
Item 1B.
|
None.
|
Item 2.
|
Properties
and Equipment
Management
believes that we have adequate facilities for conducting our business, including
properties owned and leased. Management further believes that in the event
replacement property is needed, it will be available on terms and at costs
substantially similar to the terms and costs experienced by competitors within
the transportation industry.
We lease
our 37,500 square foot headquarters in Greeneville, Tennessee from the
Greeneville-Greene County Airport Authority. The initial lease term ended in
2006 and has two ten-year and one five-year renewal options. During 2007 we
renewed the lease through 2016.
We own
our Columbus, Ohio central sorting facility. During 2006 we completed a
$5.5 million expansion of this facility. The new expanded Columbus,
Ohio facility is 125,000 square feet with 168 trailer doors. This premier
facility can unload, sort and load upwards of 3.7 million pounds in five hours.
In addition to the expansion, we process-engineered the freight sorting in the
expanded building to improve handling efficiencies. The benefits will include
reductions in the distance each shipment moves in the building to speed up the
transfer process, less handling of freight to further improve service integrity
and flexibility to operate multiple sorts at the same time.
In June
and March 2007 we completed the purchase of new facilities near Atlanta, Georgia
and Chicago, Illinois for $14.9 million and $22.3 million,
respectively. The new Atlanta, Georgia facility is over 142,000
square feet with 118 trailer doors and approximately 12,000 square feet of
office space. The new Chicago, Illinois facility is over 125,000
square feet with 110 trailer doors and over 10,000 square feet of office
space. In addition, in February 2007, the Company acquired for $3.0 million 36.7
acres of land near Dallas/Fort Worth, Texas on which we are currently building a
new regional hub facility. We anticipate completion of the Dallas/Fort
Worth facility during late 2008.
We lease
and maintain 74 additional terminals, including 11
pool distribution terminals, located at or near various airports in
the United States and Canada. Lease terms are typically for three to five years.
The remaining 20 terminals are agent stations operated by independent agents who
handle freight for us on a commission basis.
We own
the majority of trailers we use to move freight through our network.
Substantially all of our trailers are 53’ long, some of which have specialized
roller bed equipment required to serve air cargo industry customers. The average
age of our owned trailer fleet was approximately 3.0 years at December 31,
2007.
| Item 3. | Legal Proceedings |
From time
to time, we are a party to ordinary, routine litigation incidental to and
arising in the normal course of our business, most of which involve claims for
personal injury, property damage related to the transportation and handling of
freight, or workers’ compensation. We do not believe that any of these pending
actions, individually or in the aggregate, will have a material adverse effect
on our business, financial condition or results of operations.
During
the fourth quarter of the fiscal year ended December 31, 2007, no matters were
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
16
Executive
Officers of the Registrant
Pursuant
to Instruction 3 to Item 401(b) of Regulation S-K of the Securities Act and
General Instruction G(3) to Form 10-K, the following information is included in
Part I of this report. The ages listed below are as of December 31,
2007.
The
following are our executive officers:
|
Name
|
Age
|
Position
|
|||
|
Bruce
A. Campbell
|
56 |
President
and Chief Executive Officer
|
|||
|
Rodney
L. Bell
|
45 |
Chief
Financial Officer, Senior Vice President and Treasurer
|
|||
|
Craig
A. Drum
|
52 |
Senior
Vice President, Sales
|
|||
|
Matthew
J. Jewell
|
41 |
Executive
Vice President and Chief Legal Counsel
|
|||
|
Chris
C. Ruble
|
45 |
Executive
Vice President, Operations
|
|||
There are
no family relationships between any of our executive officers. All officers hold
office at the pleasure of the Board of Directors.
Bruce A.
Campbell has served as a director since April 1993, as President since August
1998, as Chief Executive Officer since October 2003 and as Chairman of the Board
since May 2007. Mr. Campbell was Chief Operating Officer from April 1990 until
October 2003 and Executive Vice President from April 1990 until August 1998.
Prior to joining us, Mr. Campbell served as Vice President of Ryder-Temperature
Controlled Carriage in Nashville, Tennessee from September 1985 until December
1989. Mr. Campbell also serves as a director of Greene County
Bancshares.
Rodney L.
Bell began serving as Chief Financial Officer, Senior Vice President and
Treasurer in June 2006. Mr. Bell, who is a Certified Public Accountant, was
appointed Chief Accounting Officer in February 2006 and continued to serve as
Vice President and Controller, positions held since October 2000 and February
1995, respectively. Mr. Bell joined the Company in March 1992 as Assistant
Controller after serving as a senior manager with the accounting firm of Adams
and Plucker in Greeneville, Tennessee.
Craig A.
Drum has served as Senior Vice President, Sales since July 2001 after joining us
in January 2000 as Vice President, Sales for one of our subsidiaries. In
February 2001, Mr. Drum was promoted to Vice President of National Accounts.
Prior to January 2000, Mr. Drum spent most of his 24-year career in air freight
with Delta Air Lines, Inc., most recently as the Director of Sales and Marketing
- Cargo.
Matthew
J. Jewell has served as Executive Vice President and Chief Legal Counsel since
January 2008. From July 2002 until January 2008, he served as Senior Vice
President and General Counsel. In October 2002, he was also appointed
Secretary. From July 2002 until May 2004, Mr. Jewell was also the Senior Vice
President, General Counsel and Secretary of Landair Corporation. From January
2000 until joining us in July 2002, Mr. Jewell was a partner with the law firm
of Austin & Sparks, P.C. Mr. Jewell was an associate at Dennis, Corry &
Porter, L.L.P. from July 1991 to December 1998 and a partner from January 1999
to January 2000.
Chris C.
Ruble has served as Executive Vice President since August 2007. From
October 2001 until August 2007, he served as Senior Vice President, Operations.
He was a Regional Vice President from September 1997 to October 2001 and a
regional manager from February 1997 to September 1997, after starting with us as
a terminal manager in January 1996. From June 1986 to August 1995, Mr. Ruble
served in various management capacities at Roadway Package System,
Inc.
17
Part
II
Our
common stock, $0.01 par value per share (“Common Stock”), trades on The NASDAQ
Global Select Stock Market™ under the symbol “FWRD.” The following table sets
forth the high and low sales prices for the Common Stock as reported by The
NASDAQ Global Select Stock Market™ for each full quarterly period within the two
most recent fiscal years.
|
2007
|
High
|
Low
|
Dividends
|
|||||||||
|
First
Quarter
|
$ | 35.32 | $ | 29.30 | $ | 0.07 | ||||||
|
Second
Quarter
|
$ | 35.78 | $ | 29.67 | $ | 0.07 | ||||||
|
Third
Quarter
|
$ | 41.90 | $ | 29.18 | $ | 0.07 | ||||||
|
Fourth
Quarter
|
$ | 34.93 | $ | 27.07 | $ | 0.07 | ||||||
|
2006
|
High
|
Low
|
Dividends
|
|||||||||
|
First
Quarter
|
$ | 39.49 | $ | 31.01 | $ | 0.07 | ||||||
|
Second
Quarter
|
$ | 41.05 | $ | 35.04 | $ | 0.07 | ||||||
|
Third
Quarter
|
$ | 43.67 | $ | 30.26 | $ | 0.07 | ||||||
|
Fourth
Quarter
|
$ | 37.58 | $ | 28.86 | $ | 0.07 | ||||||
There
were approximately 392 shareholders of record of our Common Stock as of
February 21, 2008.
Subsequent
to December 31, 2007, our Board of Directors declared a cash dividend of $0.07
per share that will be paid on March 26, 2008 to shareholders of record at
the close of business on March 12, 2008. We expect to continue to pay regular
quarterly cash dividends, though each subsequent quarterly dividend is subject
to review and approval by the Board of Directors.
There are
no material restrictions on our ability to declare dividends.
None of
our securities were sold during fiscal year 2007 without registration under the
Securities Act.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information as of December 31, 2007 with respect to
shares of our Common Stock that may be issued under existing equity compensation
plans, including the 1992 Amended and Restated Stock Option and Incentive Plan
(the “1992 Plan”), the 1999 Stock Option and Incentive Plan (the “1999 Plan”),
the Non-Employee Director Stock Option Plan (the “NED Plan”), the 2000
Non-Employee Director Award (the “2000 NED Award”), the 2005 Employee Stock
Purchase Plan (the “ESPP”) and the 2006 Non-Employee Director Stock Plan (the
“2006 NED Plan”). Our shareholders have approved each of these
plans.
18
| Equity Compensation Plan Information | ||||||||||||
|
Plan
Category
|
Number
of Securities to be Issued upon Exercise of Outstanding Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a)
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
Compensation Plans Approved by Shareholders
|
2,463,172 | $ | 26.53 | 1,498,714 | ||||||||
|
Equity
Compensation Plans Not Approved by Shareholders
|
-- | -- | -- | |||||||||
|
Total
|
2,463,172 | $ | 26.53 | 1,498,714 | ||||||||
|
(a)
|
Includes 57,005 shares of
Common Stock issuable upon the exercise of options under the 1992 Plan.
The 1992 Plan expired November 12, 2002. No additional options may be
granted under the 1992 Plan.
|
|
(b)
|
Includes the weighted-average
exercise price of options outstanding under the 1992 Plan. Excludes
purchase rights accruing under the ESPP, which has a shareholder-approved
reserve of 500,000 shares. Under the ESPP, each eligible employee may
purchase up to 2,000 shares of Common Stock at semi-annual intervals each
year at a purchase price per share equal to 90.0% of the lower of the fair
market value of the Common Stock at close of (i) the first trading day of
an option period or (ii) the last trading day of an option
period.
|
|
(c)
|
Includes shares available for
future issuance under the ESPP. As of December 31, 2007, an aggregate of
469,701 shares of Common Stock were available for issuance under the
ESPP.
|
|
|
|
19
Stock
Performance Graph
|
|
|
The
following graph compares the percentage change in the cumulative shareholder
return on our Common Stock with The NASDAQ Trucking and Transportation Stocks
Index and The NASDAQ Global Select Stock Market™ Index commencing on the last
trading day of December 2002 and ending on the last trading day of December
2007. The graph assumes a base investment of $100 made on December 31, 2002 and
the respective returns assume reinvestment of all dividends. The comparisons in
this graph are required by the SEC and, therefore, are not intended to forecast
or necessarily be indicative of any future return on our Common
Stock.
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|||||||
|
Forward
Air Corporation
|
100 | 142 | 230 | 285 | 226 | 243 | ||||||
|
NASDAQ
Trucking and Transportation Stocks Index
|
100 | 135 | 172 | 188 | 199 | 206 | ||||||
|
NASDAQ
Stock Market Index
|
100 | 150 | 162 | 165 | 181 | 201 | ||||||
Issuer
Purchases of Equity Securities
The
following table provides information with respect to purchases we made of shares
of our Common Stock during each month in the quarter ended December 31,
2007.
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program
|
Maximum
Number of Shares that May Yet Be Purchased Under the Program
(1),(2)
|
||||||||||||
|
October
1-31, 2007
|
845,000 |
$
|
28.30 | 845,000 | 1,788,827 | |||||||||||
|
November
1-30, 2007
|
-- | -- | -- | -- | ||||||||||||
|
December
1-31, 2007
|
-- | -- | -- | -- | ||||||||||||
|
Total
|
845,000 | $ | 28.30 | 845,000 | 1,788,827 | |||||||||||
|
(1)
|
On
November 17, 2005, we announced that our Board of Directors approved a
stock repurchase program for up to 3.0 million shares of our Common Stock
with a term expiring November 18, 2008. The total eligible
shares for repurchase were met during October
2007.
|
|
(2)
|
On
July 31, 2007, we announced that our Board of Directors approved a stock
repurchase program for up to 2.0 million shares of our common
stock.
|
20
Item
6. Selected Financial
Data
The
following table sets forth our selected financial data. The selected financial
data should be read in conjunction with our consolidated financial statements
and notes thereto, included elsewhere in this report.
|
Year
Ended December 31
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Income
State Data:
|
||||||||||||||||||||
|
Operating
revenue
|
$ | 392,737 | $ | 352,758 | $ | 320,934 | $ | 282,197 | $ | 241,517 | ||||||||||
|
Income
from operations
|
71,048 | 75,396 | 67,437 | 53,598 | 40,182 | |||||||||||||||
|
Operating
margin (1)
|
18.1 | % | 21.4 | % | 21.0 | % | 19.0 | % | 16.6 | % | ||||||||||
|
Net
income
|
44,925 | 48,923 | 44,909 | 34,421 | 25,815 | |||||||||||||||
|
Net
income per share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.52 | $ | 1.57 | $ | 1.41 | $ | 1.07 | $ | 0.81 | ||||||||||
|
Diluted
|
$ | 1.50 | $ | 1.55 | $ | 1.39 | $ | 1.05 | $ | 0.79 | ||||||||||
|
Cash
dividends declared per common share
|
$ | 0.28 | $ | 0.28 | $ | 0.24 | $ | -- | $ | -- | ||||||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||||||
|
Total
assets
|
$ | 241,884 | $ | 213,014 | $ | 212,600 | $ | 214,553 | $ | 175,087 | ||||||||||
|
Long-term
obligations, net of current portion
|
31,486 | 796 | 837 | 867 | 907 | |||||||||||||||
|
Shareholders'
equity
|
171,733 | 185,227 | 178,816 | 181,003 | 147,708 | |||||||||||||||
|
|
|
| (1) | Income from operations as a percentage of operating revenue. |
21
Overview
and Executive Summary
Through
our Forward Air segment, we are a leading provider of time-definite surface
transportation and related logistics services to the North American deferred air
freight market. We offer our customers local pick-up and delivery (Forward Air
Complete™) and scheduled surface transportation of cargo as a cost-effective,
reliable alternative to air transportation. We transport cargo that must be
delivered at a specific time, but is less time-sensitive than traditional air
freight. This type of cargo is frequently referred to in the transportation
industry as deferred air freight. We operate our Forward Air segment through a
network of terminals located on or near airports in 85 cities in the United
States and Canada, including a central sorting facility in Columbus, Ohio and
ten regional hubs serving key markets. We also offer our customers an
array of logistics and other services including: expedited truckload
brokerage (TLX); dedicated fleets; warehousing; customs brokerage; and shipment
consolidation, deconsolidation and handling.
On July
30, 2007, through our newly formed subsidiary and reporting segment, Forward Air
Solutions, Inc., we acquired certain assets and liabilities of USAC for
approximately $12.9 million. The purchased assets and liabilities and
the results of operations of USAC have been included in our consolidated
financial statements since July 30, 2007. USAC was a well-established
transportation service provider with 11 facilities that specialized in pool
distribution services throughout the Southeast, Midwest and
Southwest continental United States. The acquisition provides
the opportunity for us to introduce new services to new and existing customers
and to drive efficiencies in existing businesses.
Our
operations, particularly our network of hubs and terminals, represent
substantial fixed costs. Consequently, our continued growth depends in
significant part on our ability to increase the amount and revenue per pound of
the freight shipped through our network and to grow other lines of businesses,
such as pool distribution and TLX, that will allow us to maintain revenue growth
in challenging shipping environments. In addition, a key factor to success is
our ability to efficiently manage our purchased transportation costs through
efficient use of our owner-operator fleet and more expensive third-party
transportation providers.
Trends
and Developments
During
2007 our logistics business continued to experience significant growth while
revenues for our airport-to-airport service grew at a slower rate year over year
due to challenging market conditions. Through our strategic
initiative “Completing the Model” we are continuing our efforts to grow our
business through additional services to provide for revenue growth in any market
conditions. New services not only include complimentary services to
the airport-to-airport network, such as pick-up and delivery, TLX, and
value-added handling, but also include entirely new services, such as pool
distribution, which provides the opportunity for us to reach out to a more
diverse customer base.
We will
be working to grow these additional services not only through organic
development, but through strategic acquisitions. We intend to
continue to evaluate acquisitions that can increase our penetration of a
geographic area, add new customers or increase freight volume. In addition, we
expect to explore acquisitions that enable us to offer additional
services. For example, on December 3, 2007 we acquired certain assets
and liabilities of Black Hawk Freight Services, Inc. (Black Hawk) for
approximately $35.2 million to increase the penetration of our
airport-to-airport network in the Midwest, Southwest and West continental
United States. Also, on July 30, 2007, we acquired certain asset and
liabilities of USAC. Through this acquisition we are now providing a
new pool distribution service throughout the Southeast, Midwest and
Southwest continental United States. Additionally, the
acquisition of certain assets and liabilities of USAC provides an important
operating platform that will enable further expansion of the Forward Air
Complete™ pick-up and delivery product, TLX and value-added handling components
of the “Completing the Model” strategic initiative. Despite providing
separate benefits, both acquisitions fit into our goal of using strategic
acquisitions to grow existing businesses and to expand into new lines of
business.
During
2007, we experienced a decrease in our income from operations in total dollars
and as a percentage of operating revenue. The decrease in income from
operations as a percentage of operating revenue was mainly driven by increases
in certain fixed and indirect costs and change in our business mix, which
increased purchased transportation costs as a percentage of
revenue. The decrease in income from operations in total dollars was
mainly due to increases in fixed and indirect costs, such as share-based
compensation, facility rent, and insurance and claims, outpacing the increase in
operating revenue and gross profit. During 2008, we expect the
increases in our other revenue streams to continue to outpace the increase in
our airport-to-airport revenue, resulting in lower margins. However,
we believe during 2007, the substantial majority of fixed cost increases were
incurred and we expect to increase income from operations in terms of total
dollars during 2008.
During
2007 we have continued to execute our plan to expand our facilities in key
gateway cities. In February 2007, we purchased land in Dallas/Fort
Worth, Texas for the construction of a new regional hub. We also completed our
purchase of new facilities in Chicago, Illinois and Atlanta, Georgia during
March and June 2007, respectively. With these facilities we believe we will have
room to grow our business in key gateway cities and to offer additional services
such as value-added handling.
22
Segments
Effective
July 30, 2007 in conjunction with FASI’s acquisition of certain assets and
liabilities of USAC, we began reporting our operations as two segments: Forward
Air and FASI. As the creation of the second segment was the result of
our July 2007 acquisition, no reclassification of prior year financial
information was necessary.
Our
Forward Air segment includes our pre-existing airport-to-airport and TLX
services as well as our other accessorial related services such as warehousing;
customs brokerage; and value-added handling services.
Our FASI
segment includes our pool distribution business and the related assets and
liabilities purchased from USAC.
Reclassifications
Effective
January 1, 2007 we reclassified certain 2006 and 2005 revenue components of the
Forward Air segment between our three product lines to be consistent with
current year classifications. Primarily, we reclassified Forward Air
Complete revenue from other revenue to airport-to-airport revenue as management
views Forward Air Complete as an extension of our airport-to-airport network.
Also, portions of the fuel surcharge revenue were reclassified between
airport-to-airport and logistics revenue to be consistent with current year
presentation.
23
Results
of Operations
The
following table sets forth our historical financial data for the years ended
December 31, 2007 and 2006 (in millions):
|
Percent
of
|
Percent
of
|
||||||||||
|
2007
|
Revenue
|
2006
|
Revenue
|
||||||||
|
Operating
revenue
|
|||||||||||
|
Forward
Air
|
$
|
376.7
|
95.9
|
%
|
$
|
352.7
|
100.0
|
%
|
|||
|
FASI
|
16.0
|
4.1
|
--
|
--
|
|||||||
|
Total
|
392.7
|
100.0
|
352.7
|
100.0
|
|||||||
|
Purchased
transportation
|
|||||||||||
|
Forward
Air
|
162.4
|
43.1
|
146.7
|
41.6
|
|||||||
|
FASI
|
2.0
|
12.5
|
--
|
--
|
|||||||
|
Total
|
164.4
|
41.9
|
146.7
|
41.6
|
|||||||
|
Salaries,
wages and employee benefits
|
|||||||||||
|
Forward
Air
|
82.0
|
21.8
|
74.4
|
21.1
|
|||||||
|
FASI
|
6.8
|
42.5
|
--
|
--
|
|||||||
|
Total
|
88.8
|
22.6
|
74.4
|
21.1
|
|||||||
|
Operating
leases
|
|||||||||||
|
Forward
Air
|
15.8
|
4.2
|
14.5
|
4.1
|
|||||||
|
FASI
|
1.0
|
6.3
|
--
|
--
|
|||||||
|
Total
|
16.8
|
4.3
|
14.5
|
4.1
|
|||||||
|
Depreciation
and amortization
|
|||||||||||
|
Forward
Air
|
10.4
|
2.8
|
8.9
|
2.5
|
|||||||
|
FASI
|
0.5
|
3.1
|
--
|
--
|
|||||||
|
Total
|
10.9
|
2.8
|
8.9
|
2.5
|
|||||||
|
Insurance
and claims
|
|||||||||||
|
Forward
Air
|
7.2
|
1.9
|
6.0
|
1.7
|
|||||||
|
FASI
|
0.5
|
3.1
|
--
|
--
|
|||||||
|
Total
|
7.7
|
1.9
|
6.0
|
1.7
|
|||||||
|
Other
operating expenses
|
|||||||||||
|
Forward
Air
|
30.3
|
8.0
|
26.8
|
7.6
|
|||||||
|
FASI
|
2.8
|
17.5
|
--
|
--
|
|||||||
|
Total
|
33.1
|
8.4
|
26.8
|
7.6
|
|||||||
|
Income
from operations
|
|||||||||||
|
Forward
Air
|
68.6
|
18.2
|
75.4
|
21.4
|
|||||||
|
FASI
|
2.4
|
15.0
|
--
|
--
|
|||||||
|
Total
|
$
|
71.0
|
18.1
|
%
|
$
|
75.4
|
21.4
|
%
|
|||
24
The
following table presents the components of the Forward Air segment’s
operating revenue and purchased transportation for the years ended December 31,
2007 and 2006 (in millions):
|
Percent
|
Percent
|
|||||||||||||||
|
of
|
of
|
|||||||||||||||
|
|
2007
|
Revenue
|
2006
|
Revenue
|
||||||||||||
|
Forward
Air operating revenue
|
||||||||||||||||
|
Airport-to-airport
|
$ | 313.2 | 83.1 | % | $ | 301.5 | 85.5 | % | ||||||||
|
Logistics
|
42.6 | 11.3 | 31.3 | 8.9 | ||||||||||||
|
Other
|
20.9 | 5.6 | 19.9 | 5.6 | ||||||||||||
|
Total
|
$ | 376.7 | 100.0 |
%
|
$ | 352.7 | 100.0 | % | ||||||||
|
Forward
Air purchased transportation
|
||||||||||||||||
|
Airport-to-airport
|
$ | 123.7 | 39.5 | % |
$
|
119.0 | 39.5 |
%
|
||||||||
|
Logistics
|
32.7 | 76.8 | 22.8 | 72.8 | ||||||||||||
|
Other
|
6.0 | 28.7 | 4.9 | 24.6 | ||||||||||||
|
Total
|
$ | 162.4 | 43.1 | % | $ | 146.7 | 41.6 | % | ||||||||
Year Ended December
31, 2007 Compared to Year Ended December 31, 2006
Revenues
Operating
revenue increased by $40.0 million, or 11.3%, to $392.7 million in 2007 from
$352.7 million in 2006.
Forward
Air
Forward
Air operating revenue increased $24.0 million, or 6.8%, to $376.7 million in
2007 from $352.7 million in 2006. Forward Air revenue accounted for
95.9% and 100.0% of consolidated operating revenue during 2007 and 2006,
respectively.
Airport-to-airport
revenue, which is the largest component of Forward Air operating revenue,
increased $11.7 million, or 3.9%, to $313.2 million in 2007 from $301.5 million
in 2006. Airport-to-airport revenue accounted for 83.1% of the
segment’s operating revenue during 2007, compared to 85.5% during 2006. The
increase in airport-to-airport revenue was driven by a 2.3% increase in tonnage
and a 1.6% increase in revenue per pound, including the impact of fuel
surcharges. The increase in tonnage was driven by new
airport-to-airport business generated by Forward Air Complete, our pick-up and
delivery product introduced during the second half of 2006, our December 2007
acquisition of Black Hawk, and the positive impact of a competitor ceasing
operations during the fourth quarter of 2007. These increases were
partially offset by a generally weak shipping environment. The
increase in average revenue per pound substantially resulted from increased
customer utilization of Forward Air Complete, increased fuel surcharges to
offset rising fuel costs, and rate increases implemented in March
2007.
Logistics
revenue, which is primarily truckload brokerage and priced on a per mile basis,
increased $11.3 million, or 36.1%, to $42.6 million in 2007 from $31.3 million
in 2006. The increase in logistics revenue is mainly the result of
our “Completing the Model” strategic initiative to grow these services. We are
placing emphasis on capturing a larger percentage of truckload opportunities and
correspondingly increasing our access to sufficient truckload capacity through
the use of third-party transportation providers. During 2007, we
increased the number of miles driven to support our logistics revenue by
60.5%. The average revenue per mile of our logistics product,
including the impact of fuel surcharges, decreased 15.0% for 2007 versus 2006.
The decrease in our revenue per mile is largely due to the weak shipping
environment and the change in our business mix resulting from our efforts to
capture additional truckload opportunities as well as utilizing truckload
opportunities to cost effectively position our owner-operators within our
airport-to-airport network.
Other
revenue, which includes warehousing services and terminal
handling increased $1.0 million to $20.9 million, a 5.0% increase from
$19.9 million for the same period in 2006. The increase was primarily
due to increased handling and storage revenue due to new services offered
through our newly expanded facilities.
25
FASI
FASI
operating revenue of $16.0 million represents revenue earned through our new
pool distribution service acquired with the acquisition of certain assets and
liabilities of USAC on July 30, 2007. The pool distribution
business is seasonal and operating revenues tend to be higher in the third and
fourth quarters than the first and second quarters. Typically, this
pattern is the result of factors such as national holidays, customer demand and
economic conditions. Additionally, a significant portion of FASI’s
revenue
is derived from customers whose business levels are impacted by the
economy.
Purchased
Transportation
Purchased
transportation increased by $17.7 million, or 12.1%, to $164.4 million in 2007
from $146.7 million in 2006. As a percentage of consolidated
operating revenue, purchased transportation was 41.9% during 2007 compared to
41.6% for 2006.
Forward
Air
Forward
Air purchased transportation increased by $15.7 million, or 10.7%, to $162.4
million for 2007 from $146.7 million for 2006. As a percentage of Forward
Air operating revenue, purchased transportation was 43.1% during 2007
compared to 41.6% for 2006.
Purchased
transportation costs for Forward Air’s airport-to-airport network increased $4.7
million, or 3.9%, to $123.7 million for 2007 from $119.0 million for 2006.
During 2007 and 2006, airport-to-airport purchased transportation costs as a
percentage of airport-to-airport revenue was 39.5%. A 3.1% increase
in miles driven for the airport-to-airport network accounted for $3.7 million of
the increase in airport-to-airport purchased transportation. The increase in
airport-to-airport miles was due to changes in Forward Air’s shipping patterns
during the first half of 2007 as a result of changes in business mix, such as
increased shipments from our west coast terminals. Approximately $1.0
million of the increase in airport-to-airport purchased transportation is
attributable to a 0.8% increase in cost per mile. The increase in the
cost per mile is the result of increased customer utilization of Forward Air
Complete, which was introduced during the second half of 2006.
Purchased
transportation costs related to Forward Air’s logistics revenue increased
$9.9 million, or 43.4%, to $32.7 million for 2007 from $22.8 million for 2006.
For 2007, logistics’ purchased transportation costs represented 76.8% of
logistics revenue versus 72.8% for 2006. During 2007, Forward Air
increased the number of miles driven to support logistics revenue by
60.5%. The increase in miles accounted for a $13.7 million increase
in logistics purchased transportation. However, the increase in
logistics purchased transportation due to miles was partially offset by a $3.8
million decrease in logistics purchased transportation as a result of a 10.5%
decrease in the logistics cost per mile. Logistics cost per mile
decreased due to increased capacity resulting in improved purchasing power from
third party transportation providers and to a lesser extent increased use of our
less costly owner operator network. The increase in logistics
purchased transportation costs as a percentage of revenue resulted from lower
revenue per mile as discussed above partially offset by the decrease in our
logistics cost per mile.
Purchased
transportation costs related to Forward Air’s other revenue increased $1.1
million, or 22.4%, to $6.0 million for 2007 from $4.9 million for 2006. Other
purchased transportation costs as a percentage of other revenue increased to
28.7% of other revenue for 2007 from 24.6% for 2006. The
increase in other purchased transportation is attributable to increased third
party transportation services associated with new value added
services.
FASI
FASI
purchased transportation of $2.0 million represents costs associated with
payment of drivers, both networked owner operators and third party
transportation providers, for the transportation services provided to
FASI. FASI purchased transportation was 12.5% of the segment’s
operating revenue. Due to the nature of the services provided FASI
purchased transportation is lower as a percentage of revenue than our Forward
Air segment as a larger percentage of the transportation services are performed
by Company-employed drivers.
Salaries,
Wages, and Benefits
Salaries,
wages and employee benefits increased by $14.4 million, or 19.4%, to $88.8
million for 2007 from $74.4 million in 2006. As a percentage of total
operating revenue, salaries, wages and employee benefits was 22.6% during 2007
compared to 21.1% for 2006.
26
Forward
Air
Salaries,
wages and employee benefits were 21.8% of Forward Air operating revenue for 2007
compared to 21.1% for 2006. The increase in salaries, wages and employee
benefits as a percentage of revenue was attributable to increased costs for
share-based
compensation and workers compensation claims. Share-based
compensation increased $2.4 million, or 0.6%
as a
percentage of Forward Air operating revenue, due to the issuance of stock
options and non-vested shares of common stock to key members of management and
non-employee directors during 2007. In addition, workers’
compensation expense increased $0.8 million, or 0.1% as a percentage of Forward
Air operating revenue, primarily due to a $0.7 million adjustment recorded in
June 2007 that resulted from our actuarial analysis of our reserves for
workers’ compensation claims. The remaining increase in total dollars
is attributable to increases in our workforce to keep pace with the growth of
Forward Air’s business.
FASI
FASI
salary, wages and employee benefits of $6.8 million represents costs associated
with payment of employees, mainly Company drivers and employees located at our
terminals since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI salary, wages and employee benefits
were 42.5% of the segment’s operating revenue. FASI salary, wages and
employee benefits are higher as a percentage of operating revenue than our
Forward Air segment, as a larger percentage of the transportation services are
performed by Company-employed drivers.
Operating
Leases
Operating
leases increased by $2.3 million, or 15.9%, to $16.8 million for 2007 from $14.5
million in 2006. Operating leases, the largest component of which is
facility rent, were 4.3% of consolidated operating revenue for 2007 compared
with 4.1% in 2006.
Forward
Air
Operating
leases were 4.2% of Forward Air operating revenue for 2007 compared with 4.1% in
2006. The increase in operating leases in total dollars and as a
percentage of operating revenue between periods was attributable to higher rent
costs associated with the expansion of certain facilities, offset by decreases
in facility rent due to the opening of Company-owned facilities.
FASI
FASI
operating leases of $1.0 million primarily represents facility rent for FASI’s
11 facilities since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI does not currently own any of its
facilities. FASI operating leases were 6.3% of the segment’s
operating revenue.
Depreciation
and Amortization
Depreciation
and amortization increased $2.0 million, or 22.5%, to $10.9 million for 2007
from $8.9 million in 2006. Depreciation and amortization was 2.8% of
consolidated operating revenue for 2007 compared with 2.5% in 2006.
Forward
Air
Depreciation
and amortization expense as a percentage of Forward Air operating revenue was
2.8% for 2007 compared to 2.5% in 2006. The increase in depreciation and
amortization expense is due to increased depreciation related to our expanded
national hub in Columbus, Ohio, our new facilities in Chicago, Illinois and
Atlanta, Georgia, the implementation of TAP during the fourth quarter of 2006,
new tractors and trailers purchased during 2007 and the latter portion of 2006
and one month of amortization on acquired Black Hawk intangible
assets.
FASI
FASI
depreciation and amortization of $0.5 million represents $0.3 million of
depreciation on acquired equipment and $0.2 million of amortization on acquired
intangible assets since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI depreciation and amortization expense as
a percentage of the segment’s operating revenue was 3.1%.
Insurance
and Claims
Insurance
and claims expense increased $1.7 million, or 28.3%, to $7.7 million for 2007
from $6.0 million for 2006. Insurance and claims were 1.9% of
consolidated operating revenue during 2007 compared with 1.7% in
2006.
Forward
Air
Insurance
and claims were 1.9% of Forward Air operating revenue during 2007 compared to
1.7% for 2006. The $1.2 million, or 20.0% increase in insurance and
claims is primarily the result of increased insurance premiums, current vehicle
claims and the associated legal fees. The increased insurance
premiums and claims result from our increased fleet size.
27
FASI
FASI
insurance and claims of $0.5 million represents the cost of insurance premiums,
cargo claims, and accrued vehicle claims including the effects of actuarial
valuations since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI insurance and claims were 3.1% of
the segment’s operating revenue.
Other
Operating Expenses
Other
operating expenses increased $6.3 million, or 23.5%, to $33.1 million during
2007 from $26.8 million in 2006. Other operating expenses were 8.4%
of consolidated operating revenue for 2007 compared with 7.6% in
2006.
Forward
Air
Other
operating expenses were 8.0% of Forward Air operating revenue for 2007 compared
to 7.6% in 2006. The 0.4% increase in other operating expenses as a percentage
of operating revenue was primarily attributable to taxes, utilities and permits
associated with new or expanded facilities, facility relocation, specialized
training for key employees, increased fuel costs and additional sales and
marketing efforts due to the weak freight environment.
FASI
FASI
other operating expenses of $2.8 million represent costs such as fuel costs for
Company vehicles, routine vehicle maintenance, utilities for our facilities, and
miscellaneous office and administrative expenses since our USAC
acquisition on July 30, 2007. FASI other operating expenses were
17.5% of the segment’s operating revenue. Other operating
expenses are higher as a percentage of revenue than our Forward Air segment due
to the higher utilization of Company-owned equipment.
Income
from operations
Income
from operations decreased by $4.4 million, or 5.8%, to $71.0 million for 2007
compared with $75.4 million in 2006. Income from operations was 18.1%
of consolidated operating revenue for 2007 compared with 21.4% in
2006.
Forward
Air
Income
from operations decreased by $6.8 million, or 9.0%, to $68.6 million for 2007
compared with $75.4 million for 2006. Income from operations
decreased as a percentage of Forward Air operating revenue to 18.2% for 2007
from 21.4% for 2006. The decrease in income from operations both in
total dollars and as a percentage of operating revenue is attributable to
increases in certain fixed and indirect costs, as outlined in the above
discussion, outpacing the increase in operating revenue and gross
profit. The decrease in income from operations as a percentage of
revenue was also a result of the change in our business mix resulting from
slower growth in revenue from the airport-to-airport service as a percentage of
total revenue and increased revenue from less profitable services such as
truckload service and Forward Air Complete.
FASI
FASI
income from operations since our acquisition of certain assets and liabilities
of USAC on July 30, 2007 was $2.4 million, or 15.0% of FASI
revenue. As discussed above, we expect the pool distribution business
to be highly seasonal and as a result of the timing of the USAC acquisition our
2007 results primarily include peak seasonal activity. Consequently,
we believe our 2008 income from operations as a percentage of operating revenue
will be lower than experienced during 2007.
Interest
Expense
Interest
expense increased by $0.4 million to $0.5 million for 2007 compared with $0.1
million in 2006. The increase in interest expense was mostly the
result of $40.0 million in borrowings under our new line of credit facility
primarily to fund our acquisition of Black Hawk in December 2007 and repurchases
of our common stock.
Other
Income, net
Other
income, net was $1.8 million, or 0.4% of operating revenue, for 2007 compared
with $3.2 million, or 0.9% as a percentage
of operating revenue, for 2006. The decrease in other income was attributable to
lower interest income due to decreased average investment balances as a result
of cash used for stock repurchases, purchases of real property for new
facilities, and the acquisition of certain assets and liabilities of USAC
during 2007.
28
Provision
for Income Taxes
The
combined federal and state effective tax rate for 2007 was 37.9% compared to a
rate of 37.7% for
the same period in 2006. Our effective federal and state rate increased to
provide for uncertain tax positions as required by Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (an interpretation of FASB Statement No. 109), (“FIN 48”) and for
the decrease in tax-exempt interest income during 2007 due to
acquisitions, increased capital expenditures and stock
repurchases. See further discussion of the impact of FIN 48 in the
Impact of Recent Accounting
Pronouncements section.
Net
Income
As a
result of the foregoing factors, net income decreased by $4.0 million, or 8.2%,
to $44.9 million for 2007 compared to $48.9 million for 2006.
29
The
following table sets forth our historical financial data for the years ended
December 31, 2006 and 2005 (in millions):
|
Percent
of
|
Percent
of
|
||||||||||
|
2006
|
Revenue
|
2005
|
Revenue
|
||||||||
|
Operating
revenue
|
|||||||||||
|
Forward
Air
|
$
|
352.7
|
100.0
|
%
|
$
|
320.9
|
100.0
|
%
|
|||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
352.7
|
100.0
|
320.9
|
100.0
|
|||||||
|
Purchased
transportation
|
|||||||||||
|
Forward
Air
|
146.7
|
41.6
|
132.9
|
41.4
|
|||||||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
146.7
|
41.6
|
132.9
|
41.4
|
|||||||
|
Salaries,
wages and employee benefits
|
|||||||||||
|
Forward
Air
|
74.4
|
21.1
|
68.1
|
21.2
|
|||||||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
74.4
|
21.1
|
68.1
|
21.2
|
|||||||
|
Operating
leases
|
|||||||||||
|
Forward
Air
|
14.5
|
4.1
|
13.5
|
4.2
|
|||||||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
14.5
|
4.1
|
13.5
|
4.2
|
|||||||
|
Depreciation
and amortization
|
|||||||||||
|
Forward
Air
|
8.9
|
2.5
|
8.9
|
2.8
|
|||||||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
8.9
|
2.5
|
8.9
|
2.8
|
|||||||
|
Insurance
and claims
|
|||||||||||
|
Forward
Air
|
6.0
|
1.7
|
5.2
|
1.6
|
|||||||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
6.0
|
1.7
|
5.2
|
1.6
|
|||||||
|
Other
operating expenses
|
|||||||||||
|
Forward
Air
|
26.8
|
7.6
|
24.9
|
7.8
|
|||||||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
26.8
|
7.6
|
24.9
|
7.8
|
|||||||
|
Income
from operations
|
|||||||||||
|
Forward
Air
|
75.4
|
21.4
|
67.4
|
21.0
|
|||||||
|
FASI
|
--
|
--
|
--
|
--
|
|||||||
|
Total
|
$
|
75.4
|
21.4
|
%
|
$
|
67.4
|
21.0
|
%
|
|||
30
The
following table presents the components of the Forward Air segment’s
revenue and purchased transportation for the years ended December 31, 2006 and
2005 (in millions):
|
Forward
Air operating revenue
|
2006
|
Percent
of revenue
|
2005
|
Percent
of revenue
|
||||||||||||
|
Airport-to-airport
|
$ | 301.5 | 85.5 | % | $ | 277.0 | 86.3 | % | ||||||||
|
Logistics
|
31.3 | 8.9 | 24.2 | 7.6 | ||||||||||||
|
Other
|
19.9 | 5.6 | 19.7 | 6.1 | ||||||||||||
|
Total
|
$
|
352.7 | 100.0 |
%
|
$
|
320.9 | 100.0 | % | ||||||||
|
Forward
Air purchased transportation
|
||||||||||||||||
|
Airport-to-airport
|
$ | 119.0 | 39.5 | % | $ | 110.9 | 40.0 | % | ||||||||
|
Logistics
|
22.8 | 72.8 | 17.1 | 70.7 | ||||||||||||
|
Other
|
4.9 | 24.6 | 4.9 | 24.9 | ||||||||||||
|
Total
|
$ | 146.7 | 41.6 | % | $ | 132.9 | 41.4 | % | ||||||||
Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues
Operating
revenue increased by $31.8 million, or 9.9%, to $352.7 million for the year
ended December 31, 2006 from $320.9 million for the year ended December 31,
2005. Airport-to-airport revenue, which is the largest component of our
operating revenue, increased $24.5 million, or 8.8%, to $301.5 million,
accounting for 85.5% of our total operating revenue during the year ended
December 31, 2006 compared to 86.3% for the year ended December 31, 2005.
Airport-to-airport revenue decreased as a percentage of total operating revenue
is the result of the significant growth of our logistics revenue, which is
discussed below. The 8.8% increase in airport-to-airport revenue was driven by
an increase in tonnage and an increase in average revenue per pound. Tonnage
that transited our network increased by 2.2% in the year ended December 31, 2006
compared with the year ended December 31, 2005. The increase in tonnage is a
result of positive trends among our customer base and the acquisition of certain
assets of U.S. Express Enterprises, Inc. (“USX”) on May 28, 2005. These
positive trends were offset by a decline in shipping demand during the last half
of 2006, as demonstrated by the 3.0% decline in our average weight per shipment,
despite a 5.3% increase in total shipments. Our airport-to-airport business is
priced on a per pound basis and the average revenue per pound, including the
impact of fuel surcharges, increased 6.6% for the year ended December 31, 2006
versus the year ended December 31, 2005. Average revenue per pound increased
primarily as a result of rate increases implemented in March 2006, the
introduction of Forward Air Complete and increased fuel surcharges to offset
rising fuel costs.
Our
logistics revenue, which is primarily truckload brokerage and priced on a per
mile basis, increased $7.1 million, or 29.3%, to $31.3 million, accounting for
8.9% of our total operating revenue during the year ended December 31, 2006
compared to 7.6% for the year ended December 31, 2005. Logistics revenue
increased despite the loss of a significant customer in the second half of 2005
who accounted for approximately $1.6 million in logistics revenue during the
year ended December 31, 2005. The increase in logistics revenue is primarily
attributable to our ability to capture a larger percentage of truckload
opportunities as a result of our increased access to sufficient capacity through
third-party transportation providers. During the year ended December 31, 2006,
we increased the number of miles driven to support our logistics revenue by
32.6%. The increase in miles driven is a result of our continued efforts to grow
our logistics business and obtain additional customers. The average revenue per
mile of our logistics business, including the impact of fuel surcharges,
decreased 2.6% for the year ended December 31, 2006 versus the year ended
December 31, 2005. The decrease in our revenue per mile is primarily a result of
a change in the mix of business.
Other
revenue, which includes warehousing services and terminal handling and accounts
for our final component of operating revenue, increased $0.2 million, or
1.0% to $19.9 million for the year ended December 31, 2006 from $19.7 million
for the year ended December 31, 2005. The increase in other revenue is
attributable to increases in other accessorial charges for special shipping
needs, offset by decreases in terminal handling fees due to the customer loss
discussed in logistics revenue.
31
Purchased
Transportation
Purchased
transportation increased by $13.8 million, or 10.4%, to $146.7 million for the
year ended December 31, 2006 from $132.9 million for the year ended December 31,
2005. The increase in purchased transportation is primarily attributable to an
increase of approximately 9.5% in miles driven and an approximate 0.9% increase
in the total cost per mile for the year ended December 31, 2006 versus the year
ended December 31, 2005. As a percentage of total operating revenue, purchased
transportation increased to 41.6% during the year ended December 31, 2006
compared to 41.4% in the same period of 2005. For the year
ended December 31, 2006, purchased transportation costs for our
airport-to-airport network decreased to
39.5% of
airport-to-airport revenue for the year ended December 31, 2006 versus 40.0% for
the year ended December 31, 2005. The proportionate improvement resulted from
better load factors, or more revenue per mile, for the year ended December 31,
2006. For the year ended December 31, 2006, logistics purchased transportation
costs represented 72.8% of logistics revenue versus 70.7% for the year ended
December 31, 2005. The increase resulted from decreased logistics revenue per
mile discussed above and a 0.1% increase in our logistics cost per mile.
Logistics cost per mile increased as a result of the use of more third-party
transportation providers as opposed to our less costly fleet of owner-operators
offset by lower third-party transportation provider rates due to our increased
capacity and utilization. Other purchased transportation costs as a percentage
of other revenue decreased to 24.6% of other revenue for the
year ended December 31, 2006 from 24.9% for the year ended December 31, 2005.
The decrease as a percentage of revenue is primarily attributable to a change in
the revenue mix resulting from the customer loss discussed in the analysis of
logistics revenue.
Salaries,
Wages, and Benefits
Salaries,
wages and employee benefits were 21.1% of operating revenue for the year ended
December 31, 2006 compared to 21.2% for the same period of 2005. The decrease in
salaries, wages and employee benefits as a percentage of operating revenue is
attributable to operating efficiencies gained during the year. Salaries and
wages, including payroll taxes, and workers’ compensation insurance and
expenses, which increased by $3.9 million, or 6.2%, declined 0.7% as a
percentage of revenue. Salaries and wages and workers’ compensation insurance
and expenses increased to meet the additional demands of the increased tonnage
through our network and increased logistics and other services provided to our
customers, but declined as a percentage of revenue due to operating efficiencies
gained during the year as a result of TAP and other management initiatives. This
decrease as a percentage of revenue was offset by a $2.4 million, or 0.6% as a
percentage of operating revenue, increase in health care costs due to increased
participants in our health care plan, as well as a larger number of high dollar
claims. Also, during 2006 we implemented Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS
123R”), and issued non-vested shares of Common Stock to certain key employees.
As a result we recognized $1.3 million, or 0.4% of operating revenue, in
share-based compensation that is included in salaries, wages and employee
benefits for the year ended December 31, 2006. However, this increase was offset
in the year ended December 31, 2005 by a $1.3 million dollar, or 0.4% of
operating revenue, charge resulting from the decision by our Board of Directors
to accelerate the vesting of all of our outstanding and unvested stock options
to employees, officers and non-employee directors in the fourth quarter of
2005.
Operating
Leases
Operating
leases, the largest component of which is facility rent, were 4.1% of operating
revenue for the year ended December 31, 2006 compared with 4.2% for the year
ended December 31, 2005. The decrease in operating leases as a percentage of
operating revenue was attributable to the increase in operating revenue as
operating lease expenses increased $1.0 million, or 7.4%, from the year ended
December 31, 2005 to the year ended December 31, 2006. The increase is
attributable to expansion of certain facilities resulting in higher facility
rent.
Depreciation
and Amortization
Depreciation
and amortization expense as a percentage of operating revenue was 2.5% for the
year ended December 31, 2006 compared to 2.8% for the year ended December 31,
2005. Depreciation and amortization expense was $8.9 million for the year ended
December 31, 2006 and 2005. The decrease in depreciation and amortization
expense as a percentage of operating revenue was attributable to the increase in
operating revenue as depreciation and amortization remained consistent year over
year. Depreciation decreased $1.1 million year over year due to the year ended
December 31, 2005 including increased depreciation from the accelerated
depreciation of trailers sold in the third and fourth quarters of 2005. Also,
depreciation decreased $0.8 million due to several assets becoming fully
depreciated during 2006. These decreases were offset by amortization expense
increasing during the year ended December 31, 2006 by $0.5 million, or by five
additional months of amortization, due to the purchase of certain assets of USX
on May 28, 2005. The decreases were also offset by increased depreciation on new
trailers and tractors purchased during late 2005 and 2006, as well the
depreciation on our new TAP system which was fully implemented during
2006.
Insurance
and Claims
Insurance
and claims were 1.7% of operating revenue for the year ended December 31, 2006
compared to 1.6% for the year ended December 31, 2005 . The increase in
insurance and claims is primarily the result of higher insurance premiums,
offset by improved claims experience during the year ended December 31, 2006.
Additionally, during the year ended December 31, 2005, an actuarial
study of our loss development factor for vehicle liability claims was
computed and the results of the study caused us to lower our loss development
reserve for vehicle liability claims.
32
Other
Operating Expenses
Other
operating expenses were 7.6% of operating revenue for the year ended December
31, 2006 compared to 7.8% for the year ended December 31, 2005. The decrease in
other operating expenses as a percentage of operating revenue was attributable
to the
increase in operating revenue as other operating expenses increased $1.9
million, from the year ended December 31, 2005 to the year ended December 31,
2006. The $1.9 million increase in other operating expenses is primarily
attributable to a $0.7 million decrease in the gain on the sale of trailers due
to the replacement of approximately half of the trailers in our fleet during
2005. The remaining increase in total other operating expenses is
attributable to increases in volume related operating expenses, such as fuel,
tires, and station handling fees.
Income
from Operations
Income
from operations increased by $8.0 million, or 11.9%, to $75.4 million for the
year ended December 31, 2006 compared with $67.4 million for the same period in
2005. The increase in income from operations was primarily a result of the
increase in operating revenue and operating expenses decreasing as a percentage
of revenue.
Other
Income, Net
Other
income, net was $3.1 million, or 0.9% of operating revenue, for the year ended
December 31, 2006 compared with $3.8 million, or 1.2% of operating revenue, for
the year ended December 31, 2005. The decrease in other income in total dollars
and as a percentage of operating revenue was attributable to the year ended
December 31, 2005 including the $1.4 million gain from our lawsuit settlement
with the City of Atlanta regarding property we owned adjacent to the Atlanta
Hartsfield-Jackson International Airport. This decrease was offset by
higher interest income earned during the year ended December 31, 2006 due to
higher yields and average investment balances. The decrease was further offset
by 2006 including a $0.3 million gain on the recovery of escrow funds related to
a 2001 asset purchase.
Income
Taxes
The
combined federal and state effective tax rate for the year ended December 31,
2006 was 37.7% compared to a rate of 37.0% for the year ended December 31, 2005.
The increase in the effective tax rate was primarily due to a decrease in
tax-exempt interest income as a percentage of our total income before
taxes.
Net
Income
As a
result of the foregoing factors, net income increased by $4.0 million, or 8.9%,
to $48.9 million for the year ended December 31, 2006 compared with $44.9
million for the year ended December 31, 2005.
Discussion
of Critical Accounting Policies
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. We
continuously evaluate our critical accounting policies and estimates, including
those related to collectibility of accounts receivable, self-insurance loss
reserves, income taxes, share-based compensation, and valuation of goodwill. We
base our estimates on historical experience and on various assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Our financial position and
results of operations may be significantly different when reported under
different conditions or when using different assumptions in the application of
such policies. In the event estimates or assumptions prove to be different from
actual amounts, adjustments are made in subsequent periods to reflect more
current information.
We
believe the following critical accounting policies require significant judgments
and estimates in the preparation of our consolidated financial
statements.
Allowance
for Doubtful Accounts
We
evaluate the collectibility of our accounts receivable based on a combination of
factors. In circumstances in which management is aware of a specific customer’s
inability to meet its financial obligations to us (for example, bankruptcy
filings or accounts turned over for collection or litigation), we record a
specific reserve for these bad debts against amounts due to reduce the net
recognized receivable to the amount we reasonably believe will be collected. For
all other customers, we recognize reserves for these bad debts based on the
length of time the receivables are past due. Specifically, amounts that are 90
days or more past due are reserved at 50.0%. If circumstances change (i.e., we
experience higher than expected defaults or an unexpected material adverse
change in a customer’s ability to meet its financial obligations to us), the
estimates of the recoverability of amounts
due to us could be changed by a material amount. Accounts are written off after
all means of collection, including legal action, have been
exhausted.
33
Allowance
for Revenue Adjustments
Our
allowance for revenue adjustments consists of amounts reserved for billing rate
changes that are not captured upon load initiation. These adjustments generally
arise: (i) when the sales department contemporaneously grants small rate changes
(“spot quotes”) to customers that differ from the standard rates in the system;
(ii) when freight requires dimensionalization or is reweighed resulting in a
different required rate; (iii) when billing errors occur; and (iv) when data
entry errors occur. When appropriate, permanent rate changes are initiated and
reflected in the system. We monitor the manual revenue adjustments closely
through the employment of various controls that are in place to ensure that
revenue recognition is not compromised and that fraud does not occur. During
2007, average revenue adjustments per month were approximately $0.2 million, on
average revenue per month of approximately $32.7 million (less than 1.0% of
monthly revenue). In order to estimate the allowance for revenue adjustments
related to ending accounts receivable, we prepare an analysis that considers
average monthly revenue adjustments and the average lag for identifying and
quantifying these revenue adjustments. Based on this analysis, we establish an
allowance for approximately 40-80 days (dependent upon experience in the last
twelve months) of average revenue adjustments, adjusted for rebates and billing
errors. The lag is periodically adjusted based on actual historical experience.
Additionally, the average amount of revenue adjustments per month can vary in
relation to the level of sales or based on other factors (such as personnel
issues that could result in excessive manual errors or in excessive spot quotes
being granted). Both of these significant assumptions are continually evaluated
for validity.
Self-Insurance
Loss Reserves
Given the
nature of our operating environment, we are subject to vehicle and general
liability, workers’ compensation and health insurance claims. To mitigate a
portion of these risks, we maintain insurance for individual vehicle and general
liability claims exceeding $0.5 million and workers’ compensation claims
and health insurance claims exceeding approximately $0.3 million, except in
Ohio, where we are a qualified self-insured entity with an approximately $0.4
million self-insured retention. The amount of self-insurance loss reserves and
loss adjustment expenses is determined based on an estimation process that uses
information obtained from both company-specific and industry data, as well as
general economic information. The estimation process for self-insurance loss
exposure requires management to continuously monitor and evaluate the life cycle
of claims. Using data obtained from this monitoring and our assumptions about
the emerging trends, management develops information about the size of ultimate
claims based on its historical experience and other available market
information. The most significant assumptions used in the estimation process
include determining the trend in loss costs, the expected consistency in the
frequency and severity of claims incurred but not yet reported to prior year
claims, changes in the timing of the reporting of losses from the loss date to
the notification date, and expected costs to settle unpaid claims. Management
also monitors the reasonableness of the judgments made in the prior year’s
estimation process (referred to as a hindsight analysis) and adjusts current
year assumptions based on the hindsight analysis. Additionally, we utilize
actuarial analysis to evaluate open vehicle liability and workers’ compensation
claims and estimate the ongoing development exposure.
Income
Taxes
The
Company accounts for income taxes using the liability method, whereby deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to be recovered or settled.
Effective
January 1, 2007, we adopted FIN 48. Accordingly, we report a
liability for unrecognized tax benefits resulting from uncertain tax positions
taken or expected to be taken in a tax return. We recognize interest
and penalties, if any, related to unrecognized tax benefits in interest expense
and operating expenses, respectively. See further discussion of
income tax contingencies in the Impact of Recent Accounting
Pronouncements below.
Valuation of
Goodwill
In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, we conduct an annual (or more frequently if circumstances
indicate possible impairment) impairment test of goodwill at the end of the
second quarter of each year based on judgments regarding the market value of our
Common Stock, ongoing profitability and cash flow of the underlying assets.
Changes in strategy or market conditions could significantly impact these
judgments and require adjustments to recorded asset balances. For example, if we
had reason to believe that our recorded goodwill had become impaired due to
decreases in the fair market value of the underlying business, we would have to
take a charge to income for that portion of goodwill that we believe is
impaired. The annual impairment test was conducted and it did not result in any
impairment charges.
Share-Based
Compensation
Prior to
January 1, 2006, as permitted by SFAS No. 123, Accounting for Stock Based
Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, we accounted for
share-based payments to employees using Accounting Principles Board (“APB”)
Opinion No. 25, Accounting for
Stock Issued to Employees. As such, we generally recognized no
compensation cost for employee stock options as options granted had exercise
prices equal to the fair market value of our Common Stock on the date of grant.
We also recorded no compensation expense in connection with our
employee stock purchase plan as the purchase price of the stock paid by
employees was not less than 85% of the fair market value of our Common Stock at
the beginning and at the end of each purchase period.
34
Effective
January 1, 2006, we adopted SFAS 123R and elected the modified prospective
transition method. Under the modified prospective transition method, awards that
are granted, modified, repurchased or canceled after the date of adoption should
be measured and accounted for in accordance with SFAS 123R. Share-based awards
that are granted prior to the effective date should continue to be valued in
accordance with SFAS 123 and stock option expense for unvested options must be
recognized in the statement of income. On December 31, 2005, our Board of
Directors accelerated the vesting of all of our outstanding and unvested stock
options awarded to employees, officers and non-employee directors under our
stock option award plans. As a result of the acceleration of the vesting of our
outstanding and unvested options in 2005, the Company recognized $1.3 million of
stock–based compensation in 2005, but there was no additional compensation
expense recognized during the years ended December 31, 2007 and 2006 related to
options granted prior to January 1, 2006.
Our
general practice has been to make a single annual grant to key employees and to
generally make other grants only in connection with new employment or
promotions. In addition, we make annual grants to non-employee
directors in conjunction with their annual election to our Board of Directors or
at the time of their appointment to the Board of Directors. Prior to
the implementation of SFAS 123R, we utilized stock options as our sole form of
share-based awards. During the year ended December 31, 2006, we granted
non-vested shares of Common Stock (“non-vested shares”) to key employees, but
returned to granting stock options during the year ended December 31,
2007. We returned to granting stock options to key employees, as
we believe stock options more closely link long-term compensation with our
long-term goals. For non-employee directors, we continued to
issue non-vested shares during the year ended December 31, 2007.
Stock
options granted during the year ended December 31, 2007 expire seven years from
the grant date and vest ratably over a three-year period. The share-based
compensation for these stock options will be recognized, net of estimated
forfeitures, ratably over the requisite service period, or vesting period. Based
on our historical experience, forfeitures have been estimated. We used the
Black-Scholes option-pricing model to estimate the grant-date fair value of
options granted during the year ended December 31, 2007.
The fair
value of non-vested shares’ issued to employees during 2006 and non-employee
directors during 2007 and 2006 were estimated using opening market prices for
the business day of the grant. The share-based compensation for the non-vested
shares is recognized, net of estimated forfeitures, ratably over the requisite
service period, or vesting period, of three years. Forfeitures have been
estimated based on our historical experience, but will be adjusted for future
changes in forfeiture experience. We estimate the forfeitures of dividends paid
on non-vested shares and record expense for the estimated forfeitures in
accordance with SFAS 123R.
Under the
ESPP, which has been approved by shareholders, we are authorized to issue shares
of Common Stock to our employees. These shares may be issued at a price equal to
90% of the lesser of the market value on the first day or the last day of each
six-month purchase period. Common Stock purchases are paid for through periodic
payroll deductions and/or up to two large lump sum contributions. As the ESPP
does not qualify as non-compensatory under the requirements of SFAS 123R, we
recognize share-based compensation on the date of purchase based on the
difference between the purchase date fair market value and the employee purchase
price.
Prior to
the adoption of SFAS 123R, we presented all tax benefits for tax deductions
resulting from the exercise of stock options as operating cash flows on our
statements of cash flows. SFAS 123R requires the cash flows resulting from
the tax benefits for tax deductions in excess of the compensation expense
recorded for those options (excess tax benefits) to be classified as financing
cash flows. Accordingly, we classified excess tax benefits as financing cash
inflows rather than as operating cash inflows on our statement of cash flows for
the years ended December 31, 2007 and 2006.
SFAS 123R
also requires companies to calculate an initial “pool” of excess tax benefits
available at the adoption date to absorb any unused deferred tax assets that may
be recognized under SFAS 123R. The pool includes the net excess tax benefits
that would have been recognized if we had adopted SFAS 123 for recognition
purposes on its effective date. We have elected to calculate the pool of excess
tax benefits under the alternative transition method described in Financial
Accounting Standards Board (“FASB”) Staff Position
No. FAS 123(R)-3,
Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards, which also specifies the method we must use to calculate excess
tax benefits reported on the statement of cash flows.
Impact
of Recent Accounting Pronouncements
During
June 2006, the FASB issued FIN 48, which was effective for us on January 1,
2007. This interpretation was issued to clarify the accounting for uncertainty
in income taxes recognized in the financial statements by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The guidance prescribed in FIN 48 establishes a recognition
threshold of more likely than not that a tax position will be sustained upon
examination. The measurement attribute of FIN 48 requires that a tax position be
measured at the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. We adopted the provisions of FIN
48 on
January 1, 2007. As a result of the implementation of FIN 48, we recognized a
$1.4 million increase in the liability for income tax contingencies, including
related interest and penalties, which net of federal benefit of $0.4 million was
accounted for as a reduction to the January 1, 2007 balance of retained
earnings. The liability for income tax contingencies at January 1, 2007 net of
federal
benefit was $1.0 million, which represents tax positions where the realization
of the ultimate benefit is uncertain and the disallowance of which would affect
our annual effective income tax rate.
35
We file
income tax returns in the U.S. federal jurisdiction, various states, and Canada.
With a few exceptions, we are no longer subject to U.S. federal, state and
local, or Canadian examinations by tax authorities for years before 2003. The
total liability balance at December 31, 2007 consists of state tax positions for
which the realization of the ultimate benefit is uncertain and the disallowance
of which would affect our annual effective income tax rate. These positions
mainly consist of deductions taken on state tax returns for which the ultimate
deductibility is highly uncertain and the position that certain subsidiaries are
not subject to income taxes by certain states.
As
permitted by FIN 48, we recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating
expenses.
During
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, Fair
Value Measurements (“SFAS 157”), which is effective for fiscal years
beginning after November 15, 2007 with earlier adoption encouraged. SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. However, the application of SFAS 157 could change current
practice. We currently plan to adopt SFAS 157 as of January 1, 2008, but are
still evaluating the impact on our financial position and results of
operations.
During
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115 (“SFAS 159”), which permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective of SFAS 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 is effective as of
the beginning of an entity’s first fiscal year that begins after November 15,
2007. We currently plan to adopt SFAS No. 159 on January 1, 2008, but are still
evaluating the impact on our financial position and results of
operations.
Liquidity and Capital
Resources
We have
historically financed our working capital needs, including capital purchases,
with cash flows from operations and borrowings under our bank lines of credit.
Net cash provided by operating activities totaled approximately $62.4 million
for the year ended December 31, 2007 compared to approximately $52.5 million in
2006. For cash provided by operating activities, the $4.0 million decrease in
net income and the $5.0 million increase in accounts receivable were offset by a
$6.0 million increase in non-cash expenses such as depreciation and amortization
and share-based compensation. Further offsetting the decrease in net
income were reduced federal and state estimated tax payments and increases in
our accounts payables outstanding. Current year estimated tax
payments were reduced to take advantage of prior year
overpayments. The increases in accounts receivable and accounts
payable were driven by the increased activity associated with our 2007
acquisitions.
Net cash
used in investing activities was approximately $34.1 million for the year ended
December 31, 2007 compared with approximately $0.8 million provided by investing
activities in 2006. Investing activities during the year ended December 31, 2007
consisted primarily of the purchases of our new Chicago, Illinois and Atlanta,
Georgia facilities, the acquisition of certain assets and liabilities of USAC
and Black Hawk and the purchase of land near Dallas/Fort Worth, Texas. Partially
funding these activities were sales or maturities of our available-for-sale
securities. Proceeds from the sales or maturities of our available-for-sale
securities during the year ended December 31, 2007 were also used to fund stock
repurchases as further outlined below in our discussion of cash used for
financing activities.
Net cash
used in financing activities totaled approximately $31.6 million for the year
ended December 31, 2007 compared with approximately $45.4 million used in
financing activities for 2006. The decrease in cash used in financing activities
was primarily attributable to $30.0 million in net borrowings under our line of
credit, offset by a $13.4 million increase in shares repurchased and a $3.3
million decrease in proceeds from the exercise of stock
options. Borrowings from our line of credit were primarily used to
fund the acquisition of Black Hawk and stock repurchases during the fourth
quarter of 2007. Share repurchases increased and option proceeds
decreased in 2007 over 2006 as a result of a decrease in the average market
value of our shares making repurchases more attractive and the exercise of stock
options less attractive.
36
On
October 10, 2007 we entered into a new $100.0 million senior credit
facility. The new facility has a term of five years and includes an
accordion feature, which allows for an additional $50.0 million in borrowings on
such terms and conditions as set forth in
the credit agreement. Interest rates for advances under the senior
credit facility are at LIBOR plus 0.6% to 0.9% based upon covenants
related to total indebtness to earnings. The facility will replace
our existing $20.0 million line of credit. We entered into this new,
larger credit facility in order to fund potential acquisitions, repurchases of
our common stock, and for
financing other general business purposes. At December 31, 2007, we
had $64.5 million of available borrowing capacity under the senior credit
facility, not including the accordion feature, and had utilized $5.5 million of
availability for outstanding letters of credit.
At
December 31, 2007 our previous credit facility was still available as we
transitioned our letters of credit to the new senior credit
facility. Under the previous credit facility as long as we complied
with the financial covenants and ratios, the credit facility permits us to
borrow up to $20.0 million less the amount of any outstanding letters of credit.
Interest rates for advances under the facility vary based on how our performance
measures against covenants related to total indebtedness, cash flows, results of
operations and other ratios. The facility bears interest at LIBOR plus 1.0% to
1.9% and is unsecured. The facility’s expiration is April 2008. At December 31,
2007, we had no balance outstanding under the line of credit facility and had
utilized approximately $2.8 million of availability for outstanding letters of
credit.
During
the year ended December 31, 2007, we completed our purchase of new facilities
near Chicago, Illinois and Atlanta, Georgia for $22.3 million and $14.9 million,
respectively. Deposits of $3.3 million and $1.5 million paid during 2006 were
applied to the purchase price of the Chicago and Atlanta facilities,
respectively. In addition, during February 2007, we paid
approximately $3.0 million for land near Dallas/Fort Worth, Texas on which we
are planning to build a new regional hub, which we estimate will be completed in
2008. We intend to fund the expenditures for the Dallas/Fort Worth
regional hub through cash and short-term investments currently on our balance
sheet, cash provided by operating activities, the sale of existing equipment
and/or borrowings under our senior credit facility, if necessary.
On
November 17, 2005, we announced that our Board of Directors approved a stock
repurchase program for up to three million shares of common stock (the “2005
Repurchase Plan”). During the year ended December 31, 2007, we
repurchased the remaining available shares of common stock under the 2005
Repurchase plan, or 1,613,327 shares, for $49.0 million, or $30.42 per
share. During the year ended December 31, 2006, we
repurchased 1,302,695 shares of common stock under the 2005 Repurchase Plan
for $41.7 million, or $32.03 per share. During the year ended
December 31, 2005, we repurchased 83,978 shares of common stock under the 2005
Plan for $3.2 million, or $38.23 per share. Also, during the year
ended December 31, 2005, the Company repurchased an additional 1,558,350 shares
of common stock for $49.1 million, or $31.47 per share, under a repurchase plan
approved during 2002.
On July
31, 2007 our Board of Directors approved an additional stock repurchase program
for up to two million shares of our common stock (the “2007 Repurchase
Plan”). During the year ended December 31, 2007, we
repurchased 211,173 shares of common stock under the 2007 Repurchase Plan for
$6.1 million, or $28.68 per share. As of December 31, 2007, 1,788,827 shares of
common stock remain that may be repurchased under the 2007 Repurchase
Plan.
During
the years ended December 31, 2007 and 2006, cash dividends of $0.28 per share
were declared on common stock outstanding. The Company expects to continue to
pay regular quarterly cash dividends, though each subsequent quarterly dividend
is subject to review and approval by the Board of Directors.
Management believes that our available
cash, investments, expected cash generated from future operations and borrowings
under the available senior credit facility will be sufficient to satisfy our
anticipated cash needs for at least the next twelve months.
Off-Balance
Sheet Arrangements
At
December 31, 2007, we had letters of credit outstanding from banks totaling $8.3
million required by our workers’ compensation and vehicle liability insurance
providers.
37
Contractual
Obligations and Commercial Commitments
Our
contractual obligations and other commercial commitments as of December 31, 2007
(in thousands) are summarized below:
|
Contractual
Obligations
|
Payment
Due Period
|
|||||||||||||||||||
|
Total
|
Less
Than 1 Year
|
2-3
Years
|
4-5
Years
|
After
5 Years
|
||||||||||||||||
|
Capital
lease obligations
|
$ | 2,026 | $ | 323 | $ | 579 | $ | 411 | $ | 713 | ||||||||||
|
Other
long-term debt
|
752 | 617 | 135 | -- | -- | |||||||||||||||
|
Operating
leases
|
42,891 | 13,524 | 19,458 | 7,549 | 2,360 | |||||||||||||||
|
Senior
credit facility
|
30,000 | -- | -- | 30,000 | -- | |||||||||||||||
|
Total
contractual cash obligations
|
$ | 75,669 | $ | 14,464 | $ | 20,172 | $ | 37,960 | $ | 3,073 | ||||||||||
Not
included in the above table are reserves for unrecognized tax benefits
and for self insurance claims of $1.6 million and $6.2 million,
respectively.
Related
Party Transactions
Sky
Night, LLC (“Sky Night”) is a limited liability corporation owned by the former
Chairman of the Company’s Board who served until May 2005. During 2007, 2006 and
2005 we purchased air transportation services from Sky Night. In 2007, 2006 and
2005 air charter expense totaled $0.1 million per year.
During
2001, we entered into an agreement to sublease hangar space at our Greeneville,
Tennessee headquarters to Sky Night. The initial term of the sublease was for 12
months. Currently, the hangar space is being sublet on a month-to-month
basis.
Forward-Looking
Statements
This
report contains “forward-looking statements,” as defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act. Forward-looking statements
are statements other than historical information or statements of current
condition and relate to future events or our future financial performance. Some
forward-looking statements may be identified by use of such terms as “believes,”
“anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The following is a list
of factors, among others, that could cause actual results to differ materially
from those contemplated by the forward-looking statements: economic factors such
as recessions, inflation, higher interest rates and downturns in customer
business cycles, our inability to maintain our historical growth rate because of
a decreased volume of freight moving through our network or decreased average
revenue per pound of freight moving through our network, increasing competition
and pricing pressure, surplus inventories, loss of a major customer, the
creditworthiness of our customers and their ability to pay for services
rendered, our ability to secure terminal facilities in desirable locations at
reasonable rates, the inability of our information systems to handle an
increased volume of freight moving through our network, changes in fuel prices,
claims for property damage, personal injuries or workers’ compensation,
employment matters including rising health care costs, enforcement of and
changes in governmental regulations, environmental and tax matters, the handling
of hazardous materials, the availability and compensation of qualified
independent owner-operators and freight handlers needed to serve our
transportation needs and our inability to successfully integrate acquisitions.
As a result of the foregoing, no assurance can be given as to future financial
condition, cash flows or results of operations. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
38
Our
exposure to market risk relates principally to changes in interest rates for
borrowings under our senior credit facility. The senior credit facility, which
represents an aggregate principal amount of $30.0 million at December 31,
2007, bears interest at variable rates. Based on our borrowings during 2007, a
hypothetical increase in interest rates of 10.0% would have increased our annual
interest expense by less than $0.1 million and would have decreased our
annual cash flow from operations by less than $0.1 million.
Our only
other debt are equipment notes and capital lease obligations totaling $2.3
million. These notes and lease obligations all bear interest at a
fixed rate. Accordingly, there is no exposure to market risk related
to these notes and capital lease obligations.
Our cash
equivalents and short-term investments are also subject to market risk,
primarily interest-rate and credit risk. Our investments are managed by outside
professional managers within investment guidelines set by our management and
approved by our Board of Directors. Such guidelines include security type,
credit quality, and maturity and are intended to limit market risk by
restricting the Company’s investments to high credit quality securities with
relatively short-term maturities.
As of December 31, 2007, we had
short-term investments of $0.5 million. Because of the short maturities of
these instruments, a sudden change in market interest rates would not have a
material impact on the fair value of the portfolio. We would not expect our
operating results or cash flows to be materially affected by the effect of a
sudden change in market interest rates on our portfolio.
The
response to this item is submitted as a separate section of this
report.
None.
|
Item 9A.
|
Disclosure
Controls and Procedures
We
maintain controls and procedures designed to ensure that we are able to collect
the information required to be disclosed in the reports we file with the SEC,
and to process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on an evaluation of our disclosure
controls and procedures as of the end of the period covered by this report
conducted by management, with the participation of the Chief Executive Officer
and Chief Financial Officer, the Chief Executive Officer and Chief Financial
Officer have concluded that these controls and procedures are effective to
ensure that we are able to collect, process and disclose the information we are
required to disclose in the reports we file with the SEC within the required
time periods.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable
assurance to management and the Board of Directors regarding the preparation and
fair presentation of financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we assessed the effectiveness of
our internal control over financial reporting as of December 31, 2007. In making
this assessment, management used the framework set forth by the Committee on
Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated
Framework. Based on our assessment, we have concluded, as of December 31,
2007, that our internal control over financial reporting was effective based on
those criteria.
On July
30, 2007, a new subsidiary Forward Air Solutions, Inc. was
established through the acquired assets and assumed liabilities of USA Carriers,
Inc., which constituted $17.9 million and $14.4 million of total assets and net
assets, respectively, as of December 31, 2007 and $16.0 million and
$1.4 million of revenues and net income, respectively, for the year then
ended. We have excluded Forward Air Solutions, Inc. from our
assessment of and conclusion on the effectiveness of our internal control over
financial reporting.
Ernst
& Young LLP, the independent registered accounting firm that audited the
Company’s consolidated financial statements for the year ended December 31,
2007, has issued an attestation report on the Company’s internal control over
financial reporting.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
fourth quarter of 2007 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
39
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Forward
Air Corporation
We have
audited Forward Air Corporation’s internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Forward Air Corporation’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Controls
over Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
indicated in the accompanying Management’s Report on Internal Controls over
Financial Reporting, management’s assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of Forward Air Solutions, Inc., which is included in the
December 31, 2007 consolidated financial statements of Forward Air Corporation
and constituted $17.9 million and $14.4 million of total assets and net assets,
respectively, as of December 31, 2007 and $16.0 million and $1.4 million of
revenues and net income, respectively for the year then ended. Our
audit of internal controls over financial reporting of Forward Air Corporation
also did not include an evaluation of the internal controls over financial
reporting of Forward Air Solutions, Inc.
In our
opinion, Forward Air Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
COSO criteria.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Forward Air
Corporation as of December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007 and our report dated February 25,
2008 expressed an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
|
Nashville,
Tennessee
|
|
|
February
25, 2008
|
40
Item
9B.
Other
Information
Not
applicable.
Part
III
The
information required by this item with respect to our directors is incorporated
herein by reference to our proxy statement for the 2008 Annual Meeting of
Shareholders (the “2008 Proxy Statement”). The 2008 Proxy Statement will be
filed with the SEC not later than 120 days subsequent to December 31,
2007.
Pursuant
to Item 401(b) of Regulation S-K, the information required by this item with
respect to our executive officers is set forth in Part I of this
report.
|
Item 11.
|
The
information required by this item is incorporated herein by reference to the
2008 Proxy Statement.
|
Item 12.
|
The
information required by this item is incorporated herein by reference to the
2008 Proxy Statement.
The
information required by this item is incorporated herein by reference to the
2008 Proxy Statement.
The
information required by this item is incorporated herein by reference to the
2008 Proxy Statement.
Part
IV
|
(a)(1) and
(2)
|
List of Financial Statements and
Financial Statement
Schedules.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
|
(a)(3)
|
List of
Exhibits.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
|
(b)
|
Exhibits.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
|
(c)
|
Financial Statement
Schedules.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
41
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Forward
Air Corporation
|
||
|
Date:
February 27, 2008
|
By:
|
/s/
Rodney L. Bell
|
|
Rodney
L. Bell
Chief
Financial Officer, Senior Vice President
|
||
|
and
Treasurer (Principal Financial
Officer)
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Bruce A. Campbell
|
Chairman,
President and Chief Executive
|
February
27, 2008
|
||
|
Bruce
A. Campbell
|
Officer
(Principal Executive Officer)
|
|||
|
/s/
Rodney L. Bell
|
Chief
Financial Officer, Senior Vice President
|
February
27, 2008
|
||
|
Rodney
L. Bell
|
and
Treasurer ( Principal Financial Officer)
|
|||
|
/s/
Michael P. McLean
|
Chief
Accounting Officer, Vice President and
|
February
27, 2008
|
||
|
Michael
P. McLean
|
Controller
|
|||
|
/s/
Matthew J. Jewell
|
Executive
Vice President, Chief Legal Officer
|
February
27, 2008
|
||
|
Matthew
J. Jewell
|
And
Secretary
|
|||
|
/s/
Richard W. Hanselman
|
Lead
Director
|
February
27, 2008
|
||
|
Richard
W. Hanselman
|
||||
|
/s/
C. Robert Campbell
|
Director
|
February
27, 2008
|
||
|
C.
Robert Campbell
|
||||
|
/s/
C. John Langley, Jr.
|
Director
|
February
27, 2008
|
||
|
C.
John Langley, Jr.
|
||||
|
/s/
Tracy A. Leinbach
|
Director
|
February
27, 2008
|
||
|
Tracy
A. Leinbach
|
||||
|
/s/
G. Michael Lynch
|
Director
|
February
27, 2008
|
||
|
G.
Michael Lynch
|
||||
|
/s/
Ray A. Mundy
|
Director
|
February
27, 2008
|
||
|
Ray
A. Mundy
|
||||
|
/s/
Gary L. Paxton
|
Director
|
February
27, 2008
|
||
|
Gary
L. Paxton
|
||||
|
/s/
B. Clyde Preslar
|
Director
|
February
27, 2008
|
||
|
B.
Clyde Preslar
|
42
Annual
Report on Form 10-K
Item
8, Item 15(a)(1) and (2), (a)(3), (b) and (c)
List
of Financial Statements and Financial Statement Schedule
Financial
Statements and Supplementary Data
Certain
Exhibits
Financial
Statement Schedule
Year
Ended December 31, 2007
Forward
Air Corporation
Greeneville,
Tennessee
F-1
Form
10-K — Item 8 and Item 15(a)(1) and (2)
Index
to Financial Statements and Financial Statement Schedule
The
following consolidated financial statements of Forward Air Corporation are
included as a separate section of this report:
|
Page
No.
|
|
|
F-3
|
|
|
F-4
|
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
|
|
F-9
|
The
following financial statement schedule of Forward Air Corporation is included as
a separate section of this report.
|
Schedule
II - Valuation and Qualifying Accounts
|
S-1
|
All other
schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
F-2
The Board
of Directors and Shareholders
Forward
Air Corporation
We have
audited the accompanying consolidated balance sheets of Forward Air Corporation
as of December 31, 2007 and 2006, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2007. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Forward Air
Corporation at December 31, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U. S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
As
discussed in Note 1 to the consolidated financial statements, in 2007 the
Company changed its method of accounting for income tax contingencies, and in
2006 the Company changed its method of accounting for share-based
compensation.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Forward Air Corporation’s
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 25, 2008 expressed an unqualified opinion
thereon.
|
/s/
Ernst & Young LLP
|
|
|
Nashville,
Tennessee
|
|
|
February
25, 2008
|
F-3
|
Consolidated
Balance Sheets
|
||||||||
|
(in
thousands, except share data)
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 4,909 | $ | 8,231 | ||||
|
Short-term
investments
|
522 | 61,650 | ||||||
|
Accounts
receivable, less allowance of $1,142 in 2007 and $860 in
2006
|
59,734 | 48,486 | ||||||
|
Income
taxes receivable
|
-- | 3,403 | ||||||
|
Inventories
|
558 | 501 | ||||||
|
Prepaid
expenses and other current assets
|
3,941 | 4,114 | ||||||
|
Deferred
income taxes
|
1,786 | 1,178 | ||||||
|
Total
current assets
|
71,450 | 127,563 | ||||||
|
Property
and equipment
|
||||||||
|
Land
|
16,928 | 2,611 | ||||||
|
Buildings
|
39,895 | 12,367 | ||||||
|
Equipment
|
95,690 | 82,646 | ||||||
|
Leasehold
improvements
|
4,421 | 3,566 | ||||||
|
Construction
in progress
|
1,420 | -- | ||||||
|
Total
property and equipment
|
158,354 | 101,190 | ||||||
|
Less
accumulated depreciation and amortization
|
55,322 | 47,875 | ||||||
|
Net
property and equipment
|
103,032 | 53,315 | ||||||
|
Goodwill
and other acquired intangibles:
|
||||||||
|
Goodwill
|
36,053 | 15,588 | ||||||
|
Other
acquired intangibles, net of accumulated amortization of $3,740 in 2007
and $2,019 in 2006
|
29,991 | 10,731 | ||||||
|
Total
net goodwill and other acquired intangibles
|
66,044 | 26,319 | ||||||
|
Other
assets
|
1,358 | 5,817 | ||||||
|
Total
assets
|
$ | 241,884 | $ | 213,014 | ||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||
F-4
|
Forward
Air Corporation
Consolidated
Balance Sheets (continued)
|
||||||||
|
(in
thousands, except share data)
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Liabilities
and shareholders' equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 11,714 | $ | 7,949 | ||||
|
Accrued
payroll and related items
|
4,474 | 3,117 | ||||||
|
Insurance
and claims accruals
|
3,345 | 3,265 | ||||||
|
Payables
to owner-operators
|
2,916 | 2,128 | ||||||
|
Collections
on behalf of customers
|
930 | 1,347 | ||||||
|
Other
accrued expenses
|
1,395 | 1,287 | ||||||
|
Income
taxes payable
|
1,214 | -- | ||||||
|
Current
portion of capital lease obligations
|
213 | 40 | ||||||
|
Current
portion of long-term debt
|
617 | -- | ||||||
|
Total
current liabilities
|
26,818 | 19,133 | ||||||
|
Capital
lease obligations, less current portion
|
1,351 | 796 | ||||||
|
Long-term
debt, less current portion
|
30,135 | -- | ||||||
|
Other
long-term liabilities
|
4,476 | 1,271 | ||||||
|
Deferred
income taxes
|
7,371 | 6,587 | ||||||
|
Commitments
and contingencies (Note 10)
|
||||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock, $0.01 par value:
|
||||||||
|
Authorized
shares-5,000,000
|
||||||||
|
No
shares issued
|
-- | -- | ||||||
|
Common
stock, $0.01 par value:
|
||||||||
|
Authorized
shares-50,000,000
|
||||||||
|
Issued
and outstanding shares 28,648,068 in 2007
|
286 | 304 | ||||||
|
and
30,372,082 in 2006
|
||||||||
|
Additional
paid-in capital
|
-- | -- | ||||||
|
Retained
earnings
|
171,447 | 184,923 | ||||||
|
Total
shareholders' equity
|
171,733 | 185,227 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 241,884 | $ | 213,014 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5
|
Consolidated
Statements of Income
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Operating
revenue:
|
||||||||||||
|
Forward
Air
|
||||||||||||
|
Airport-to-airport
|
$ | 313,162 | $ | 301,551 | $ | 277,001 | ||||||
|
Logistics
|
42,626 | 31,321 | 24,226 | |||||||||
|
Other
|
20,923 | 19,886 | 19,707 | |||||||||
|
Forward
Air Solutions
|
||||||||||||
|
Pool
distribution
|
16,026 | -- | -- | |||||||||
|
Total
operating revenue
|
392,737 | 352,758 | 320,934 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Purchased
transportation
|
||||||||||||
|
Forward
Air
|
||||||||||||
|
Airport-to-airport
|
123,658 | 119,011 | 110,853 | |||||||||
|
Logistics
|
32,727 | 22,767 | 17,126 | |||||||||
|
Other
|
6,049 | 4,943 | 4,933 | |||||||||
|
Forward
Air Solutions
|
||||||||||||
|
Pool
distribution
|
2,003 | -- | -- | |||||||||
|
Total
purchased transportation
|
164,437 | 146,721 | 132,912 | |||||||||
|
Salaries,
wages and employee benefits
|
88,803 | 74,448 | 68,086 | |||||||||
|
Operating
leases
|
16,761 | 14,458 | 13,486 | |||||||||
|
Depreciation
and amortization
|
10,824 | 8,934 | 8,947 | |||||||||
|
Insurance
and claims
|
7,685 | 5,967 | 5,202 | |||||||||
|
Other
operating expenses
|
33,179 | 26,834 | 24,864 | |||||||||
|
Total
operating expenses
|
321,689 | 277,362 | 253,497 | |||||||||
|
Income
from operations
|
71,048 | 75,396 | 67,437 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
expense
|
(491 | ) | (81 | ) | (104 | ) | ||||||
|
Other,
net
|
1,756 | 3,229 | 3,904 | |||||||||
|
Total
other income
|
1,265 | 3,148 | 3,800 | |||||||||
|
Income
before income taxes
|
72,313 | 78,544 | 71,237 | |||||||||
|
Income
taxes
|
27,388 | 29,621 | 26,328 | |||||||||
|
Net
income
|
$ | 44,925 | $ | 48,923 | $ | 44,909 | ||||||
|
Net
income per share:
|
||||||||||||
|
Basic
|
$ | 1.52 | $ | 1.57 | $ | 1.41 | ||||||
|
Diluted
|
$ | 1.50 | $ | 1.55 | $ | 1.39 | ||||||
|
Dividends
per share
|
$ | 0.28 | $ | 0.28 | $ | 0.24 | ||||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
29,609 | 31,091 | 31,847 | |||||||||
|
Diluted
|
29,962 | 31,521 | 32,419 | |||||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||||||
F-6
|
Consolidated
Statements of Shareholders' Equity
|
|||||||||||||||||||
|
(in
thousands except per share data)
|
|||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||
|
Additional
|
Other
|
Total
|
|||||||||||||||||
|
Common
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Shareholders'
|
|||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Equity
|
||||||||||||||
|
Balance
at December 31, 2004
|
32,398
|
$
|
324
|
$
|
36,279
|
$
|
144,396
|
$
|
4
|
$
|
181,003
|
||||||||
|
Net
income for 2005
|
--
|
--
|
--
|
44,909
|
--
|
44,909
|
|||||||||||||
|
Unrealized
loss on securities
|
|||||||||||||||||||
|
available
for sale, net of ($2) tax
|
--
|
--
|
--
|
--
|
(4
|
)
|
(4
|
)
|
|||||||||||
|
Comprehensive
income
|
|
|
|
|
|
|
44,905
|
||||||||||||
|
Exercise
of stock options
|
643
|
6
|
6,206
|
--
|
--
|
6,212
|
|||||||||||||
|
Common
stock issued under
|
|||||||||||||||||||
|
employee
stock purchase plan
|
11
|
1
|
293
|
--
|
--
|
294
|
|||||||||||||
|
Acceleration
of vesting of stock options
|
--
|
--
|
1,300
|
--
|
--
|
1,300
|
|||||||||||||
|
Dividends
($0.24 per share)
|
--
|
--
|
--
|
(7,668
|
)
|
--
|
(7,668
|
)
|
|||||||||||
|
Common
stock repurchased under stock
|
|||||||||||||||||||
|
repurchase
plan
|
(1,690
|
)
|
(17
|
)
|
(49,108
|
)
|
(3,135
|
)
|
--
|
(52,260
|
)
|
||||||||
|
Cash
paid for fractional shares in 3-for-2
|
|||||||||||||||||||
|
stock
split
|
(1
|
)
|
--
|
(44
|
)
|
--
|
--
|
(44
|
)
|
||||||||||
|
Income
tax benefit from stock options
|
|||||||||||||||||||
|
exercised
|
--
|
--
|
5,074
|
--
|
--
|
5,074
|
|||||||||||||
|
Balance
at December 31, 2005
|
31,361
|
314
|
--
|
178,502
|
--
|
178,816
|
|||||||||||||
|
Net
and comprehensive income for 2006
|
--
|
--
|
--
|
48,923
|
--
|
48,923
|
|||||||||||||
|
Exercise
of stock options
|
305
|
3
|
4,359
|
--
|
--
|
4,362
|
|||||||||||||
|
Common
stock issued under employee
|
|||||||||||||||||||
|
stock
purchase plan
|
9
|
--
|
268
|
--
|
--
|
268
|
|||||||||||||
|
Share-based
compensation
|
--
|
--
|
1,307
|
--
|
--
|
1,307
|
|||||||||||||
|
Dividends
($0.28 per share)
|
--
|
--
|
--
|
(8,694
|
)
|
--
|
(8,694
|
)
|
|||||||||||
|
Common
stock repurchased under stock
|
|||||||||||||||||||
|
repurchase
plan
|
(1,303
|
)
|
(13
|
)
|
(7,901
|
)
|
(33,808
|
)
|
--
|
(41,722
|
)
|
||||||||
|
Income
tax benefit from stock options
|
|||||||||||||||||||
|
exercised
|
--
|
--
|
1,967
|
--
|
--
|
1,967
|
|||||||||||||
|
Balance
at December 31, 2006
|
30,372
|
304
|
--
|
184,923
|
--
|
185,227
|
|||||||||||||
|
Adoption
of FIN 48
|
--
|
--
|
--
|
(977
|
)
|
--
|
(977
|
)
|
|||||||||||
|
Net
and comprehensive income for 2007
|
--
|
--
|
--
|
44,925
|
--
|
44,925
|
|||||||||||||
|
Exercise
of stock options
|
57
|
--
|
1,017
|
--
|
--
|
1,017
|
|||||||||||||
|
Common
stock issued under employee
|
|||||||||||||||||||
|
stock
purchase plan
|
9
|
--
|
259
|
--
|
--
|
259
|
|||||||||||||
|
Share-based
compensation
|
--
|
--
|
3,710
|
--
|
--
|
3,710
|
|||||||||||||
|
Dividends
($0.28 per share)
|
--
|
--
|
--
|
(8,305
|
)
|
--
|
(8,305
|
)
|
|||||||||||
|
Vesting
of previously non-vested shares
|
42
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||
|
Cash
settlement of share-based awards
|
|||||||||||||||||||
|
for
minimum tax withholdings
|
(8
|
)
|
--
|
(250
|
)
|
--
|
--
|
(250
|
)
|
||||||||||
|
Common
stock repurchased under stock
|
|||||||||||||||||||
|
repurchase
plans
|
(1,824
|
)
|
(18
|
)
|
(5,997
|
)
|
(49,119
|
)
|
--
|
(55,134
|
)
|
||||||||
|
Income
tax benefit from stock options
|
|||||||||||||||||||
|
exercised
|
--
|
--
|
1,261
|
--
|
--
|
1,261
|
|||||||||||||
|
Balance
at December 31, 2007
|
28,648
|
$
|
286
|
$
|
--
|
$
|
171,447
|
$
|
--
|
$
|
171,733
|
||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-7
|
Consolidated
Statements of Cash Flows
|
|||||||||||
|
(in
thousands)
|
|||||||||||
|
Year ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Operating
activities:
|
|||||||||||
|
Net
income
|
$
|
44,925
|
$
|
48,923
|
$
|
44,909
|
|||||
|
Adjustments
to reconcile net income to net cash provided by
|
|||||||||||
|
operating
activities:
|
|||||||||||
|
Depreciation
and amortization
|
10,824
|
8,934
|
8,947
|
||||||||
|
Share-based
compensation
|
3,710
|
1,307
|
1,300
|
||||||||
|
Atlanta
condemnation settlement gain
|
--
|
--
|
(1,428
|
)
|
|||||||
|
Other
non-cash charges
|
--
|
--
|
274
|
||||||||
|
Gain
on sale of property and equipment
|
(172
|
)
|
(42
|
)
|
(728
|
)
|
|||||
|
Recovery
on receivables
|
(33
|
)
|
(223
|
)
|
(121
|
)
|
|||||
|
Provision
for revenue adjustments
|
2,312
|
2,095
|
2,100
|
||||||||
|
Deferred
income taxes
|
596
|
(136
|
)
|
(48
|
)
|
||||||
|
Tax
benefit of stock options exercised
|
(1,261
|
)
|
(1,967
|
)
|
5,074
|
||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|||||||||||
|
Accounts
receivable
|
(11,474
|
)
|
(6,516
|
)
|
(7,438
|
)
|
|||||
|
Inventories
|
(41
|
)
|
66
|
(145
|
)
|
||||||
|
Prepaid
expenses and other current assets
|
332
|
341
|
(705
|
)
|
|||||||
|
Accounts
payable and accrued expenses
|
6,606
|
(4,058
|
)
|
615
|
|||||||
|
Income
taxes
|
6,069
|
3,743
|
(1,374
|
)
|
|||||||
|
Net
cash provided by operating activities
|
62,393
|
52,467
|
51,232
|
||||||||
|
Investing
activities:
|
|||||||||||
|
Proceeds
from disposal of property and equipment
|
574
|
3,665
|
2,804
|
||||||||
|
Purchases
of property and equipment
|
(47,026
|
)
|
(15,454
|
)
|
(22,077
|
)
|
|||||
|
Deposits
in escrow for construction of new terminals
|
--
|
(4,793
|
)
|
--
|
|||||||
|
Proceeds
from sales or maturities of available-for-sale securities
|
143,410
|
229,330
|
229,865
|
||||||||
|
Purchases
of available-for-sale securities
|
(82,282
|
)
|
(211,980
|
)
|
(197,265
|
)
|
|||||
|
Acquisition
of businesses
|
(48,627
|
)
|
--
|
(12,750
|
)
|
||||||
|
Proceeds
from Atlanta condemnation settlement/release of
|
|||||||||||
|
amounts
held in escrow
|
-- |
--
|
2,765
|
||||||||
|
Other
|
(119
|
)
|
26
|
(242
|
)
|
||||||
|
Net
cash (used in) provided by investing activities
|
(34,070
|
)
|
794
|
3,100
|
|||||||
|
Financing
activities:
|
|||||||||||
|
Payments
of capital lease obligations
|
(493
|
)
|
(39
|
)
|
(31
|
)
|
|||||
|
Borrowings
on line of credit
|
40,000
|
--
|
1,504
|
||||||||
|
Payments
on line of credit
|
(10,000
|
)
|
(1,504
|
)
|
--
|
||||||
|
Proceeds
from exercise of stock options
|
1,017
|
4,362
|
|
5,938
|
|||||||
|
Payments
of cash dividends
|
(8,305
|
)
|
(8,694
|
)
|
(7,668
|
)
|
|||||
|
Cash
paid for fractional shares in 3-for-2 stock split
|
--
|
--
|
(44
|
)
|
|||||||
|
Proceeds
from common stock issued under employee stock purchase
plan
|
259
|
268
|
294
|
||||||||
|
Cash
settlement of share-based awards for minimum tax
withholdings
|
(250
|
)
|
--
|
--
|
|||||||
|
Repurchase
of common stock
|
(55,134
|
)
|
(41,722
|
)
|
(54,071
|
)
|
|||||
|
Tax
benefit of stock options exercised
|
1,261
|
1,967
|
--
|
||||||||
|
Net
cash used in financing activities
|
(31,645
|
)
|
(45,362
|
)
|
(54,078
|
)
|
|||||
|
Net
(decrease) increase in cash
|
(3,322
|
)
|
7,899
|
254
|
|||||||
|
Cash
at beginning of year
|
8,231
|
332
|
78
|
||||||||
|
Cash
at end of year
|
$
|
4,909
|
$
|
8,231
|
$
|
332
|
|||||
|
Non-cash
activity:
|
|||||||||||
|
Uncollected
proceeds from disposal of property and equipment in
|
|||||||||||
|
accounts
receivable
|
$
|
--
|
$
|
49
|
$
|
1,970
|
|||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|||||||||||
F-8
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(in
thousands, except share and per share data)
|
1.
|
Accounting
Policies
|
Basis
of Presentation and Principles of Consolidation
Forward
Air Corporation's (the Company) services can be broadly classified into two
principal segments: Forward Air, Inc. (Forward Air) and Forward Air
Solutions, Inc. (FASI).
Through
the Forward Air business the Company is a leading provider of time-definite
transportation and related logistics services to the North American deferred air
freight market and its activities can be broadly classified into three
categories of services. Forward Air’s airport-to-airport service
operates a comprehensive national network for the time-definite surface
transportation of deferred air freight. The airport-to-airport
service offers customers local pick-up and delivery and scheduled surface
transportation of cargo as a cost effective, reliable alternative to air
transportation. Forward Air’s logistics services provides expedited
truckload brokerage and dedicated fleet services. Forward Air’s other
services include shipment consolidation and deconsolidation, warehousing,
customs brokerage, and other handling. The Forward Air segment
primarily provides its transportation services through a network of terminals
located at or near airports in the United States and
Canada.
FASI was
formed in July 2007 in conjunction with the Company’s acquisition of certain
assets and liabilities of USA Carriers, Inc. ("USAC"). FASI
provides pool distribution services throughout the Southeast, Midwest and
Southwest continental United States. Pool distribution involves
the consolidation and shipment of several smaller less than truckload shipments
to a common area or region. Once at the regional destination, the
consolidated loads are then deconsolidated and delivered to their unique
destinations.
In
connection with the USAC acquisition, the Company reorganized its management
reporting structure along these lines of business. In accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise and Related Information (“SFAS 131”), the Company has
evaluated the segment reporting requirements and determined that it now has two
reportable segments.
Further,
revenues and associated purchased transportation by service line have been
disclosed on the face of the Consolidated Statements of Income.
The
accompanying consolidated financial statements of the Company include Forward
Air Corporation and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Significant areas requiring management
estimates include the following key financial areas:
Allowance
for Doubtful Accounts
The
Company evaluates the collectibility of its accounts receivable based on a
combination of factors. In circumstances in which management is aware of a
specific customer’s inability to meet its financial obligations to the Company
(for example, bankruptcy filings, accounts turned over for collection or
litigation), the Company records a specific reserve for these bad debts against
amounts due to reduce the net recognized receivable to the amount the Company
reasonably believes will be collected. For all other customers, the Company
recognizes reserves for these bad debts based on the length of time the
receivables are past due. Specifically, amounts that are 90 days or more past
due are reserved at 50.0%. If circumstances change (i.e., the Company
experiences higher than expected defaults or an unexpected material adverse
change in a customer’s ability to meet its financial obligations to the
Company), the estimates of the recoverability of amounts due to the Company
could be changed by a material amount. Accounts are written off after all means
of collection, including legal action, have been exhausted.
F-9
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
1.
|
Accounting Policies
(Continued)
|
Allowance
for Revenue Adjustments
The
Company’s allowance for revenue adjustments consists of amounts reserved for
billing rate changes that are not captured upon load initiation. These
adjustments generally arise: (1) when the sales department contemporaneously
grants small rate changes (“spot quotes”) to customers that differ from
the standard rates in the system; (2) when freight requires dimensionalization
or is reweighed resulting in a different required rate; (3) when billing errors
occur; and (4) when data entry errors occur. When appropriate, permanent rate
changes are initiated and reflected in the system. The Company monitors the
manual
revenue adjustments closely through the employment of various controls that are
in place to ensure that revenue recognition is not compromised and that fraud
does not occur. During 2007, average revenue adjustments per month were
approximately $193, on average revenue per month of approximately
$32,728 (less than 1.0% of monthly revenue). In order to estimate the
allowance for revenue adjustments related to ending accounts receivable, the
Company prepares an analysis that considers average monthly revenue adjustments
and the average lag for identifying and quantifying these revenue adjustments.
Based on this analysis, the Company establishes an allowance for approximately
40-80 days (dependent upon experience in the last twelve months) of average
revenue adjustments, adjusted for rebates and billing errors. The lag is
periodically adjusted based on actual historical experience. Additionally, the
average amount of revenue adjustments per month can vary in relation to the
level of sales or based on other factors (such as personnel issues that could
result in excessive manual errors or in excessive spot quotes being granted).
Both of these significant assumptions are continually evaluated for
validity.
Self-Insurance
Loss Reserves
Given the
nature of the Company’s operating environment, the Company is subject to vehicle
and general liability, workers’ compensation and health insurance claims. To
mitigate a portion of these risks, the Company maintains insurance for
individual vehicle and general liability claims exceeding $500 and workers’
compensation claims and health insurance claims exceeding $250, except in Ohio,
where for workers’ compensation we are a qualified self-insured entity with
a $350 self-insured retention. The amount of self-insurance loss reserves and
loss adjustment expenses is determined based on an estimation process that uses
information obtained from both company-specific and industry data, as well as
general economic information. The estimation process for self-insurance loss
exposure requires management to continuously monitor and evaluate the life cycle
of claims. Using data obtained from this monitoring and the Company’s
assumptions about the emerging trends, management develops information about the
size of ultimate claims based on its historical experience and other available
market information. The most significant assumptions used in the estimation
process include determining the trend in loss costs, the expected consistency in
the frequency and severity of claims incurred but not yet reported to prior year
claims, changes in the timing of the reporting of losses from the loss date to
the notification date, and expected costs to settle unpaid claims. Management
also monitors the reasonableness of the judgments made in the prior year’s
estimation process (referred to as a hindsight analysis) and adjusts current
year assumptions based on the hindsight analysis. Additionally, the Company
utilizes actuarial analyses to evaluate open claims and estimate the ongoing
development exposure.
Revenue
Recognition
Operating
revenue and related costs are recognized as of the date shipments are completed.
No single customer accounted for more than 10.0% of operating revenue in 2007,
2006 or 2005.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash and cash equivalents.
Available-For-Sale
Securities
Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported in other comprehensive income. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity computed under the effective interest method.
Such amortization is included in other income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income. The cost of securities sold is based on
the specific identification method. Interest on securities classified as
available-for-sale is included in other income in the consolidated statements of
income.
Inventories
Inventories
of tires, replacement parts, supplies, and fuel for equipment are stated at the
lower of cost or market utilizing the FIFO (first-in, first-out) method of
determining cost. Inventories of tires and replacement parts are not material in
the aggregate. Replacement parts are expensed when placed in service, while
tires are capitalized and amortized over their expected life. Replacement parts
and tires are included as a component of other operating expenses in the
consolidated statements of income.
F-10
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
1.
|
Accounting Policies
(Continued)
|
Property
and Equipment
Property
and equipment are stated at cost. Expenditures for normal repair and maintenance
are expensed as incurred. Depreciation of property and equipment is calculated
based upon the cost of the asset, reduced by its estimated salvage value, using
the straight-line method over the estimated useful lives as
follows:
|
Buildings
|
30-40
years
|
|
Equipment
|
3-10
years
|
|
Leasehold
improvements
|
Lesser
of Useful Life or Initial Lease
Term
|
Depreciation
expense for each of the three years ended December 31, 2007, 2006 and 2005 was
$9,103, $7,659 and $8,203, respectively.
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable.
Impairment is recognized on assets classified as held and used when the sum of
undiscounted estimated cash flows expected to result from the use of the asset
is less than the carrying value. If such measurement indicates a possible
impairment, the estimated fair value of the asset is compared to its net book
value to measure the impairment charge, if any. When the criteria have been met
for long-lived assets to be classified as held for sale, the assets are recorded
at the lower of carrying value or fair market value (less selling
costs).
Operating
Leases
Certain
operating leases include rent increases during the initial lease term. For these
leases, the Company recognizes the related rental expenses on a straight-line
basis over the term of the lease, which includes any rent holiday period, and
records the difference between the amounts charged to operations and amount paid
as rent as a rent liability.
Goodwill
and Other Intangible Assets
Goodwill
is recorded at cost based on the excess of purchase price over the fair value of
net assets acquired. Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”), goodwill and intangible assets with indefinite lives are
not amortized but are subject to annual impairment tests in accordance with the
statement. Other intangible assets are amortized over their useful lives. The
Company completed the required annual impairment test of goodwill during each of
the second quarters of 2007, 2006 and 2005, and determined that goodwill had not
been impaired. Any subsequent impairment losses will be reflected in income from
operations in the consolidated statements of income.
Acquisitions
are accounted for using the purchase method in accordance with SFAS No. 141,
Business Combinations ("SFAS
141"). The definite-lived intangible assets of the
Company resulting from acquisition activity and the related amortization are
described in Note 2,
Acquisition of Businesses.
Software
Development
Costs
related to software developed or acquired for internal use are expensed or
capitalized and then amortized in accordance with the American Institute of
Certified Public Accountants Statement Of Position No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The Company
uses a five-year straight line amortization for the capitalized amounts of
software development costs.
Income
Taxes
The
Company accounts for income taxes using the liability method, whereby deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to be recovered or settled.
F-11
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
1.
|
Accounting Policies
(Continued)
|
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (an interpretation of FASB Statement No. 109) (“FIN
48”). Accordingly, the Company reports a liability for unrecognized
tax benefits resulting from uncertain tax positions taken or expected to be
taken in a tax return. The Company recognizes interest and penalties,
if any, related to unrecognized tax benefits in
interest expense and operating expenses, respectively. See Recently
Issued Accounting Pronouncements for information regarding the adoption of FIN
48.
Net
Income Per Share
The
Company calculates net income per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS
128”). Under SFAS 128, income per basic share excludes any
dilutive effects of options, warrants and convertible securities. Diluted income
per share includes any dilutive effects of options, warrants and convertible
securities, and uses the treasury stock method in calculating
dilution.
Comprehensive
Income
Comprehensive
income includes any changes in the equity of the Company from transactions and
other events and circumstances from non-operational sources. Unrealized gains
and losses on available-for-sale securities are included in other comprehensive
income for all years presented.
Share-Based
Payments
Prior to
January 1, 2006, as permitted by SFAS No. 123, Accounting for Stock Based
Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, the Company accounted
for share-based payments to employees using Accounting Principles Board (“APB”)
Opinion No. 25, Accounting for
Stock Issued to Employees. As such, the Company generally recognized no
compensation cost for employee stock options as options granted had exercise
prices equal to the fair market value of our common stock on the date of grant.
The Company also recorded no compensation expense in connection with our
employee stock purchase plan.
Effective
January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS
123R”), and elected the modified prospective transition method. Under the
modified prospective transition method, awards that are granted, modified,
repurchased or canceled after the date of adoption should be measured and
accounted for in accordance with SFAS 123R. Share-based awards that are granted
prior to the effective date should continue to be valued in accordance with SFAS
123 and stock option expense for unvested options must be recognized in the
statement of income. On December 31, 2005, the Company’s Board of Directors
accelerated the vesting of all outstanding and unvested stock options
awarded to employees, officers and non-employee directors under the Company’s
stock option award plans. The primary purpose of the accelerated vesting of
these options was to eliminate future compensation expense that the Company
would otherwise have recognized in its statement of income with respect to these
unvested options upon the adoption of SFAS 123R. As a result of the acceleration
of the vesting of the Company’s outstanding and unvested options in 2005, the
Company recognized $1,300 of stock based compensation in 2005, but there was no
additional compensation expense recognized during the years ended December 31,
2007 and 2006 related to options granted prior to January 1, 2006.
The
Company’s general practice has been to make a single annual grant to key
employees and to generally make other grants only in connection with new
employment or promotions. In addition, the Company makes annual
grants to non-employee directors in conjunction with their annual election to
our Board of Directors or at the time of their appointment to the Board of
Directors. Prior to the implementation of SFAS 123R, the Company
utilized stock options as its sole form of share-based awards. During the year
ended December 31, 2006, the Company granted non-vested shares of Common Stock
(“non-vested shares”) to key employees, but returned to granting stock options
during the year ended December 31, 2007. The Company returned to
granting stock options to key employees as the Company believes stock options
more closely link long-term compensation with the Company’s long-term
goals. For non-employee directors, we continued to grant
non-vested shares during the year ended December 31, 2007.
F-12
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
1. Accounting
Policies (Continued)
The
share-based compensation for these stock options and non-vested shares is
recognized, net of estimated forfeitures, ratably over the requisite service
period, or vesting period. Based on the Company’s historical experience,
forfeitures have been estimated. The Company uses the Black-Scholes
option-pricing model to estimate the grant-date fair value of options
granted. The fair values of non-vested shares issued to employees in
2006 and non-employee directors in 2007 and 2006 were estimated using
opening market prices for the business day of the grant. The
following table contains the weighted-average assumptions used to estimate the
fair value of options granted. These assumptions are highly
subjective and changes in these assumptions can materially
affect the fair value estimate.
|
December
31,
|
||||||||
|
2007
|
2006
|
2005
|
||||||
|
Expected
dividend yield
|
0.8
|
%
|
--
|
%
|
0.8
|
%
|
||
|
Expected
stock price volatility
|
37.0
|
%
|
--
|
%
|
40.0
|
%
|
||
|
Weighted
average risk-free interest rate
|
4.5
|
%
|
--
|
%
|
4.0
|
%
|
||
|
Expected
life of options (years)
|
4.5
|
--
|
7.0
|
|||||
If the
Company had adopted SFAS 123R in the year ended December 31, 2005, the
amount of compensation cost that would have been recognized during the year
ended December 31, 2005, would have approximated the following:
|
2005
|
||||
|
Net
income, as reported
|
$ | 44,909 | ||
|
Pro
forma compensation expense, net of tax
|
(12,579 | ) | ||
|
Pro
forma net income
|
$ | 32,330 | ||
|
Pro
forma net income per share:
|
||||
|
Basic
|
$ | 1.02 | ||
|
Diluted
|
$ | 1.00 | ||
Under the
2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by
shareholders, the Company is authorized to issue shares of common stock to our
employees. These shares may be issued at a price equal to 90% of the lesser of
the market value on the first day or the last day of each six-month purchase
period. Common stock purchases are paid for through periodic payroll deductions
and/or up to two large lump sum contributions. As the ESPP does not qualify as
non-compensatory under the requirements of SFAS 123R, the Company recognizes
share-based compensation on the date of purchase based on the difference between
the purchase date fair market value and the employee purchase
price.
Prior to
the adoption of SFAS 123R, the Company presented all tax benefits for tax
deductions resulting from the exercise of stock options as operating cash flows
in its statements of cash flows. SFAS 123R requires the cash flows
resulting from the tax benefits for tax deductions in excess of the compensation
expense recorded for those options (excess tax benefits) to be classified as
financing cash flows. Accordingly, the Company classified excess tax benefits as
financing cash inflows rather than as operating cash inflows in its statements
of cash flows beginning with the year ended December 31, 2006.
SFAS 123R
also requires companies to calculate an initial “pool” of excess tax benefits
available at the adoption date to absorb any unused deferred tax assets that may
be recognized under SFAS 123R. The pool includes the net excess tax
benefits that would have been recognized if the Company had adopted
SFAS 123 for recognition purposes on its effective date. The Company
elected to calculate the pool of excess tax benefits under the alternative
transition method described in FASB Staff Position No. FAS 123(R)-3,
Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards, which also
specifies the method the Company must use to calculate excess tax benefits
reported on the statement of cash flows.
Recently
Issued Accounting Pronouncements
During June
2006, the FASB issued FIN 48, which is effective for fiscal years beginning
after December 15, 2006. This interpretation was issued to clarify the
accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The guidance prescribed in FIN 48
establishes a recognition threshold of more likely than not that a tax position
will be sustained upon examination. The measurement attribute of FIN 48 requires
that a tax position be measured at the largest amount of benefit that is greater
than 50% likely of being realized upon ultimate settlement. The Company adopted
the provisions of FIN 48 on January 1, 2007. As a result of the implementation
of FIN 48, the Company recognized a $1,397
increase in the liability for income tax contingencies, including related
interest and penalties, which net of federal benefit of $420 was accounted for
as a reduction to the January 1, 2007 balance of retained earnings. The
liability for income tax contingencies at
January 1, 2007, net of federal benefit, is $977 which represents tax positions
where the realization of the ultimate benefit is uncertain and the disallowance
of which would affect the Company’s annual effective income tax
rate.
F-13
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
1.
|
Accounting Policies
(Continued)
|
During
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which is effective for fiscal years beginning after
November 15, 2007 with earlier adoption encouraged. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157
does not require any new fair value measurements. However, the application of
SFAS 157 could change current practice. The Company currently plans to adopt
SFAS 157 as of January 1, 2008 but is still evaluating the impact on our
financial position and results of operations.
During
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 (“SFAS 159”), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective of
SFAS 159 is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company currently plans to adopt SFAS 159 as
of January 1, 2008 but is still evaluating the impact on our financial position
and results of operations.
Reclassifications
Certain
reclassifications have been made to prior-year financial statements to conform
to the 2007 presentation. These reclassifications had no effect on net income as
previously reported.
|
2.
|
Acquisition of
Businesses
|
On July
30, 2007, the Company acquired certain assets and liabilities of USAC. The
purchased assets and liabilities and the results of operations of USAC have been
included in the consolidated financial statements, in our FASI segment, since
July 30, 2007. USAC was a well-established transportation service
provider with 11 facilities that specialized in pool distribution services
throughout the Southeast, Midwest and Southwest continental United
States. USAC generated approximately $32,000 in revenue during the
year ended December 31, 2006. Pool distribution involves the consolidation
and shipment of several smaller less than truckload shipments to a common area
or region. Once at the regional destination, the consolidated loads
are then deconsolidated and delivered to their unique destinations. In
conjunction with the Company’s strategy to expand into new services
complimentary to the airport-to-airport business, the acquisition provides the
opportunity for the Company to introduce new services to new and existing
customers and to drive efficiencies in existing businesses.
The aggregate purchase price was $12,941, of which $12,704 was paid
with the Company’s available cash, and the remaining $237 is payable upon final
settlement of purchased working capital. Under the purchase
agreement, $1,250 of the purchase price was paid into an escrow account to
protect the Company against potential unknown liabilities. The
amount paid into escrow will be released to the sellers one year after the
acquisition date. The total purchase price has been allocated to the assets
acquired and liabilities assumed based on preliminary estimated fair values at
acquisition. The Company will adjust the purchase price as required to
reflect the final valuation.
Of the
$5,000 in acquired USAC intangible assets, $4,800 and $200 were allocated to
customer relationships and non-compete agreements, respectively. The customer
relationships and non-compete agreements are being amortized on a straight-line
basis over 14 and 10 years, respectively. The Company began
amortizing the assets on a straight-line basis in August 2007 and recorded
amortization expense of approximately $151 for the year ended December 31,
2007. No pro forma disclosures have been included in these financial
statements for USAC, as USAC was immaterial to the consolidated financial
statements taken as a whole.
On
December 3, 2007, the Company acquired certain assets and liabilities of Black
Hawk Freight Services, Inc. ("Black Hawk"). The purchased assets and
liabilities and the results of operations of Black Hawk have been included in
the consolidated financial statements since December 3, 2007. Black
Hawk was a privately held provider of airport-to-airport, truckload, custom, and
cartage services that generated approximately $30,000 in revenue during the year
ended December 31, 2006. The acquisition of Black Hawk operations are
complimentary to those of the Forward Air segment and will increase the
geographic footprint of the segment in the Midwestern United
States.
F-14
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
2.
|
Acquisition of Businesses
(Continued)
|
The
aggregate purchase price was $35,242, paid with the Company’s available cash and
borrowings from the Company’s senior credit facility (see note
5). Under the purchase agreement, $3,500 of the purchase price was
paid into an escrow account to protect the Company against potential unknown
liabilities. The amount paid into escrow will be released to the
sellers one year after the acquisition date. The total purchase price
has been allocated to the assets acquired and liabilities assumed based on
preliminary estimated fair values at acquisition. The Company will
adjust the purchase price as required to reflect the final
valuation.
Of the
$15,300 in acquired Black Hawk intangible assets, $13,800 and $1,500 were
allocated to customer relationships and non-compete agreements, respectively.
The customer relationships and non-compete agreements are being amortized on a
straight-line basis over 10 and 5 years, respectively. The Company
began amortizing the assets on a straight-line basis in December 2007 and
recorded amortization expense of approximately $140 for the year ended December
31, 2007. No pro forma disclosures have been included in these financial
statements for Black Hawk, as Black Hawk was immaterial to the consolidated
financial statements taken as a whole.
During
2007, the Company also acquired certain assets of two other operations for
$681 in cash. The assets purchased were truckload and cargo handling
customer relationships. These acquisitions were done to expand
existing logistics and other services currently provided. The
acquired intangibles are being amortized over two to three years and
amortization during the year ended December 31, 2007 was $155.
The
preliminary allocations of the respective 2007 purchase prices discussed above
are as follows:
|
USAC
|
Black
Hawk
|
Other
|
Total
|
|||||||||||||
|
Current
assets
|
$ | 2,262 | $ | 17 | $ | -- | $ | 2,279 | ||||||||
|
Property
and equipment
|
3,425 | 3,928 | -- | 7,353 | ||||||||||||
|
Non-compete
agreements
|
200 | 1,500 | -- | 1,700 | ||||||||||||
|
Customer
relationships
|
4,800 | 13,800 | 681 | 19,281 | ||||||||||||
|
Goodwill
|
3,709 | 16,756 | -- | 20,465 | ||||||||||||
|
Other
noncurrent assets
|
215 | -- | -- | 215 | ||||||||||||
|
Total
assets acquired
|
14,611 | 36,001 | 681 | 51,293 | ||||||||||||
|
Current
liabilities
|
456 | -- | -- | 456 | ||||||||||||
|
Debt
and capital leases
|
1,214 | 759 | -- | 1,973 | ||||||||||||
|
Total
liabilities assumed
|
1,670 | 759 | -- | 2,429 | ||||||||||||
|
Net
assets acquired
|
$ | 12,941 | $ | 35,242 | $ | 681 | $ | 48,864 | ||||||||
On May
28, 2005, the Company acquired certain assets of the airport-to-airport
operations of U.S. Express Enterprises, Inc. (“USX”) for $12,750 in cash. In
connection with the purchase, the Company acquired the airport-to-airport
customer list of USX and USX agreed not to compete in the airport-to-airport
market for a period of ten years. The purchase price was allocated to acquired
intangible assets with a total value of $12,750 (majority of the allocation to
the non-compete agreement). The acquired intangible assets will be amortized
over a period of ten years. The Company began amortizing the assets on a
straight-line basis during June 2005 and recorded amortization expense of
approximately $1,275, $1,275, and $744 for the years ended December 31, 2007,
2006 and 2005, respectively. The results of operations of the USX
airport-to-airport operations are included in the consolidated financial
statements, in our Forward Air segment, for the years ended December 31, 2007
and 2006, but only the results of operations from May 28, 2005 through December
31, 2005 are included in the consolidated statement of income for the year ended
December 31, 2005.
F-15
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
DECEMBER
31, 2007
|
|
2.
|
Acquisition of Businesses
(Continued)
|
The
estimated amortization expense for the next five years on definite-lived
intangible assets as of December 31, 2007 is as follows:
|
2008
|
2009
|
2010
|
2011
|
2012
|
||||||||||||||||
|
USX
|
$ | 1,275 | $ | 1,275 | $ | 1,275 | $ | 1,275 | $ | 1,275 | ||||||||||
|
USAC
|
363 | 363 | 363 | 363 | 363 | |||||||||||||||
|
Black
Hawk
|
1,680 | 1,680 | 1,680 | 1,680 | 1,655 | |||||||||||||||
|
Other
|
257 | 227 | 42 | -- | -- | |||||||||||||||
|
Total
|
$ | 3,575 | $ | 3,545 | $ | 3,360 | $ | 3,318 | $ | 3,293 | ||||||||||
Customer
relationships, and non-compete agreements have weighted-average
useful lives of 10.6 years and 5.6 years, respectively, from the dates of
acquisition.
The
changes in the carrying value of goodwill by segment for the year ended December
31, 2007 are as follows:
|
Forward
|
||||||||||||
|
Air
|
FASI
|
Total
|
||||||||||
|
Beginning
balance, December 31, 2006
|
$ | 15,588 | $ | -- | $ | 15,588 | ||||||
|
USAC
acquisition
|
-- | 3,709 | 3,709 | |||||||||
|
Black
Hawk acquisition
|
16,756 | -- | 16,756 | |||||||||
|
Ending
balance, December 31, 2007
|
$ | 32,344 | $ | 3,709 | $ | 36,053 | ||||||
|
|
The
acquired goodwill is deductible for tax
purposes.
|
|
3.
|
Investments
|
The
Company had a total of $522 and $61,650 in available-for-sale securities as of
December 31, 2007 and 2006, respectively. The Company’s investments consist of
state municipal bonds (often referred to as auction rate securities). The
Company has the option to go to auction every 7-35 days with the auction rate
securities, but the stated maturities of the investments are longer-term. The
Company had interest income of $1,750, $2,973 and $2,476 for the years ended
December 31, 2007, 2006 and 2005, respectively, on its
investments. The decline in investments and interest income from 2006
to 2007 was the result of cash used to fund acquisition activity (see note 2),
the purchase of new facilities (see note 4) and the repurchase of Company common
stock (see note 6).
Securities
are classified as available for sale when the Company does not intend to hold
the securities to maturity nor regularly trade the securities.
The
following is a summary of available-for-sale securities at December 31, 2007 and
2006:
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
|
December 31, 2007
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | 522 | $ | -- | $ | -- | $ | 522 | ||||||||
|
December 31, 2006
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | 61,650 | $ | -- | $ | -- | $ | 61,650 | ||||||||
Gross
realized gains (losses) on sales of available-for-sale securities were less than
$1 for each of the years ended December 31, 2007,
2006 and 2005. The net adjustments to unrealized holding gains (losses) on
available-for-sale securities included in other comprehensive income totaled $0,
$0 and ($4) in 2007, 2006 and 2005, respectively. Realized gains and losses are
recorded based on the specific identification of securities sold.
F-16
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
3.
|
Investments
(Continued)
|
The Company’s remaining
investments have a remaining contract maturity of over twenty years, but the
expected maturities will differ from contractual maturities because the Company
has the intent and ability to sell prior to stated maturity without penalty (via
auction).
|
4.
|
Property
|
In June 2007, the Company completed the purchase of a new regional hub near
Atlanta, Georgia for $14,870. The deposit of $1,478 paid in September 2006,
previously included in noncurrent other assets, was applied to this purchase
price.
In March 2007, the Company completed the purchase of a new terminal near
Chicago, Illinois for $22,312. The deposit of $3,316 paid in July 2006,
previously included in noncurrent other assets, was applied to this purchase
price.
In addition, in February 2007, the Company acquired land near Dallas/Fort Worth,
Texas for $3,045 on which the Company plans to build a new regional hub
facility. The Company anticipates completion of this facility during
2008.
|
5.
|
Debt and Capital Lease
Obligations
|
Credit
Facilities
On
October 10, 2007, the Company entered into a $100,000 senior credit facility.
This new facility has a term of five years and includes an accordion feature,
which allows for an additional $50,000 in borrowings on such terms and
conditions as set forth in the Credit Agreement. The senior credit facility
matures on October 10, 2012. The facility will replace the Company's
existing $20,000 line of credit, which matures on April 30, 2008. The
Company entered into this new, larger credit facility in order to fund potential
acquisitions, the repurchase of its common stock, and for financing other
general business purposes. Interest rates for advances under the
facility are at LIBOR plus 0.6% to 0.9% based upon covenants related to total
indebtedness to earnings (5.2% at December 31, 2007). The agreement contains
certain covenants and restrictions, none of which are expected to significantly
affect our operations or ability to pay dividends. No assets are
pledged as collateral against the senior credit facility. As of
December 31, 2007, the Company had $30,000 outstanding under the senior credit
facility. At December 31, 2007, the Company had $64,530 of available borrowing
capacity outstanding under the senior credit facility, not including the
accordion feature, and had utilized $5,470 of availability for outstanding
letters of credit.
At
December 31, 2007 the Company’s previous $20,000 unsecured working capital line
of credit was still available while the Company transitioned letters of credit
to the new senior credit facility. On May 25, 2006, the Company
amended the unsecured working capital line of credit facility to extend the
maturity date to April 30, 2008. Interest rates for advances under the facility
vary from LIBOR plus 1.0% to 1.9% based upon covenants related to total
indebtedness and cash flows (6.0% and 6.4% at December 31, 2007 and 2006,
respectively). The agreement contains certain covenants and restrictions, none
of which are expected to significantly affect our operations or ability to pay
dividends. As of December 31, 2007 and 2006, the Company had no borrowings
outstanding under this line of credit facility. At December 31, 2007 and 2006,
the Company had $17,190 and $15,615 of available borrowing capacity outstanding
under the line, respectively, and had utilized $2,810 and $4,385 of
availability for outstanding letters of credit, respectively.
Other
Long-Term Debt
In
conjunction with the July 2007 acquisition of certain assets and
liabilities of USAC, the Company assumed $1,188 in equipment notes. Interest on
the equipment notes is fixed at various rates between 5.9% and
8.5%.
Annual
maturities of long-term debt including the senior credit facility, at
December 31, 2007, are as follows:
|
2008
|
$ | 617 | ||
|
2009
|
117 | |||
|
2010
|
18 | |||
|
2011
|
-- | |||
|
2012
|
30,000
|
|||
|
Total
|
$ | 30,752 |
F-17
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
5.
|
Debt and Capital Lease
Obligations (Continued)
|
Capital
Leases
In
September 2000, the Company entered into an agreement with the Rickenbacker Port
Authority (“Rickenbacker”) to lease a building located near the Company’s
Columbus, Ohio hub facility. At the inception of the lease, the Company made a
$2,004 loan to Rickenbacker. The lease agreement has a ten-year initial term,
with two five-year renewal options. At December 31, 2007, the present
value of the future minimum lease payments was $796. Because the lease met the
criteria for classification as a capital lease, the leased building was recorded
in property and equipment at $3,015 (which represented the present value of the
total minimum lease payments, including the $2,004 initial payment), as it is
less than the fair value at the inception date. The building is being
depreciated over the initial lease term. SFAS No. 13, Accounting for Leases,
requires that a lease meet one or more of four specified criteria in order to be
classified as a capital lease. With respect to the Rickenbacker lease, it was
classified as a capital lease since the present value of the minimum lease
payments, including the initial $2,004 payment, exceeded 90.0% of the fair value
of the property at lease inception.
In July
and December 2007 in conjunction with the acquisition of certain assets and
liabilities of USAC and Black Hawk, the Company assumed several equipment leases
that met the criteria for classification as a capital lease. The
leased equipment is being amortized over the shorter of the lease term or their
useful life.
Property
and equipment include the following amounts for assets under capital
leases:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Buildings
|
$ | 3,015 | $ | 3,015 | ||||
|
Equipment
|
621 | -- | ||||||
|
Less
accumulated amortization
|
1,260 | 1,066 | ||||||
| $ | 2,376 | $ | 1,949 | |||||
Amortization
of assets under capital leases is included in depreciation and amortization
expense.
Future
minimum payments, by year and in the aggregate, under non-cancelable capital
leases with initial or remaining terms of one year or more consist of the
following at December 31, 2007:
|
2008
|
$ | 323 | ||
|
2009
|
316 | |||
|
2010
|
263 | |||
|
2011
|
210 | |||
|
2012
|
201 | |||
|
Thereafter
|
713 | |||
|
Total
|
2,026 | |||
|
Less
amounts representing interest
|
462 | |||
|
Present
value of net minimum lease payments
|
||||
|
(including
current portion of $213)
|
$ | 1,564 |
Interest
Payments
Interest
payments during 2007, 2006 and 2005 were $433, $81 and $104, respectively, none
of which were capitalized.
F-18
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
6.
|
Shareholders’ Equity, Stock
Options and Net Income per
Share
|
Preferred
Stock
The
Company has a shareholder rights plan that allows the Board of Directors to
issue, at its discretion, up to 5,000,000 shares of preferred stock, par value
$0.01. The terms and conditions of the preferred shares are to be determined by
the Board of Directors. No shares have been issued to date. The
shareholder rights plan also establishes notice requirements for nominations for
election to the Board of Directors and for proposing matters that can be acted
upon by shareholders at a meeting.
Cash
Dividends
Prior to
February 15, 2005, the Company had never declared a cash dividend. During each
quarter of 2007 and 2006, the Company’s Board of Directors declared a cash
dividend of $0.07 per share of common stock. During each quarter of 2005, the
Company’s Board of Directors declared a cash dividend of $0.06 per share of
common stock. On February 11, 2008, the Company’s Board of Directors declared a
$0.07 per share dividend that will be paid in the first quarter of 2008.
The Company expects to continue to pay regular quarterly cash dividends, though
each subsequent quarterly dividend is subject to review and approval by the
Board of Directors.
Repurchase of Common
Stock
On July
25, 2002, the Company announced that its Board of Directors approved a stock
repurchase program for up to three million shares of common stock (the “2002
Repurchase Plan”). During 2005, the Company completed the repurchase of the
shares authorized under the 2002 Repurchase Plan. For the year ended December
31, 2005, the Company repurchased 1,558,350 shares of common stock, under the
2002 Repurchase Plan for $49,050, or $31.47 per share.
On
November 17, 2005, the Company announced that its Board of Directors approved a
stock repurchase program for up to three million shares of common stock (the
“2005 Repurchase Plan”). During the year ended December 31, 2007, the Company
repurchased the remaining available shares of common stock under the 2005
Repurchase plan, or 1,613,327 shares, for $49,079, or $30.42 per
share. For the year ended December 31, 2006, the Company repurchased
1,302,695 shares of common stock under the 2005
Repurchase Plan for $41,722, or $32.03 per share. For the year ended December
31, 2005, the Company repurchased 83,978
shares of common stock under the 2005 Repurchase Plan for $3,210, or $38.23 per
share.
On July
31, 2007 our Board of Directors approved an additional stock repurchase program
for up to two million shares of the Company’s common stock (the “2007 Repurchase
Plan”). During the year ended December 31, 2007, the Company
repurchased 211,173 shares of common stock under the 2007 Repurchase Plan for
$6,055, or $28.68 per share. As of December 31, 2007, 1,788,827 shares of common
stock remain that may be repurchased under the 2007 Repurchase
Plan.
Share-Based
Compensation
At
December 31, 1998, the Company had reserved 4,500,000 shares of common stock
under the 1992 Amended and Restated Stock Option and Incentive Plan (the “1992
Plan”). As of February 2004, the Company had reserved 4,500,000 common shares
under the 1999 Stock Option and Incentive Plan, resulting in a total of
9,000,000 shares being reserved under the Plans. Options issued under the Plans
have seven to ten-year terms and originally vested over a one to five year
period. As of November 12, 2002, no additional options may be granted under the
1992 Plan resulting in the cancellation of 57,000 options available for grant
under the 1992 Plan. On December 31, 2005, the Company's Board of Directors
accelerated the vesting of all of the Company's outstanding and unvested stock
options awarded to employees, officers and non-employee directors under the
Company's stock option award plans.
F-19
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
6.
|
Shareholders’ Equity, Stock
Options and Net Income per Share
(Continued)
|
Employee
Activity - Options
The
following table summarizes the Company’s employee stock option activity and
related information for the years ended December 31, 2007, 2006 and
2005:
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||
|
Options
|
Exercise
|
Options
|
Exercise
|
Options
|
Exercise
|
|||||||||||||
|
(000)
|
Price
|
(000)
|
Price
|
(000)
|
Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
1,475
|
$
|
23
|
1,957
|
$
|
23
|
1,443
|
$
|
15
|
|||||||||
|
Granted/converted
|
847
|
31
|
--
|
--
|
985
|
29
|
||||||||||||
|
Exercised
|
(64
|
)
|
20
|
(476
|
)
|
23
|
(443
|
)
|
9
|
|||||||||
|
Forfeited
|
(12
|
)
|
29
|
(6
|
)
|
34
|
(28
|
)
|
22
|
|||||||||
|
Outstanding
at end of year
|
2,246
|
$
|
26
|
1,475
|
$
|
23
|
1,957
|
$
|
23
|
|||||||||
|
Exercisable
at end of year
|
1,409
|
$
|
23
|
1,475
|
$
|
23
|
1,957
|
$
|
23
|
|||||||||
|
Options/shares
available for grant
|
357
|
1,192
|
1,315
|
|||||||||||||||
|
Average
aggregate intrinsic value
|
||||||||||||||||||
|
for
options outstanding
|
$
|
13,552
|
||||||||||||||||
|
Average
aggregate intrinsic value
|
||||||||||||||||||
|
for
exercisable options
|
$
|
12,733
|
||||||||||||||||
|
Weighted-average
fair value of
|
||||||||||||||||||
|
options
granted during the year
|
$
|
10.98
|
$
|
--
|
$
|
12.79
|
||||||||||||
The
following table summarizes information about stock options outstanding as of
December 31, 2007:
|
Range
of Exercise Price
|
Number Outstanding
(000)
|
Weighted-Average
Remaining Contractual Life
|
Weighted-Average
Exercise Price
|
Number Exercisable
(000)
|
Weighted-Average
Exercise Price
|
||||||||
|
$
|
4.17
- 4.95
|
66
|
1.0
|
$
|
4.28
|
66
|
$
|
4.28
|
|||||
|
11.33
- 15.87
|
210
|
4.9
|
13.55
|
210
|
13.55
|
||||||||
|
17.60
- 24.94
|
366
|
5.0
|
20.49
|
366
|
20.49
|
||||||||
|
28.97
- 35.53
|
1,604
|
6.7
|
30.24
|
767
|
28.99
|
||||||||
|
$
|
4.17
- 35.53
|
2,246
|
6.1
|
$
|
26.33
|
1,409
|
$
|
23.32
|
|||||
Share-based
compensation expense for options granted was $1,823 and was recognized
in salaries, wages and employee benefits. The total tax benefit related to the
share-based expense for these options was $390 for the year ended December 31,
2007. Total compensation cost, net of estimated forfeitures, related to the
options not yet recognized
in earnings was $6,431 at December 31, 2007. Total unrecognized compensation
cost will be adjusted for future changes in estimated forfeitures.
Employee
Activity – Non-vested shares
During
the year ended December 31, 2006. the Company granted 129,350 non-vested shares
to key employees with a weighted-average fair value of $36.09. During
the years ended December 31, 2007 and 2006, 0 and 13,750 non-vested shares were
forfeited by employees. Share-based compensation expense of $1,286
and $1,175 for non-vested shares granted to employees during 2006 was recognized
in salaries, wages and employee benefits during the years ended December 31,
2007 and 2006, respectively. Estimated dividend forfeitures on
F-20
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
6.
|
Shareholders’ Equity, Stock
Options and Net Income per Share
(Continued)
|
non-vested
shares recorded to share-based compensation during the years ended December 31,
2007 and 2006 were $1 and $5, respectively. The total tax benefit
related to this share-based expense was $487 and $443 for the years ended
December 31, 2007 and 2006, respectively.
During
the year end December 31, 2007, 38,540 previously non-vested shares with a total
grant date fair value of $1,391 vested to employees, leaving 77,060 non-vested
shares outstanding at December 31, 2007. Total compensation cost, net of
estimated forfeitures, related to the non-vested shares not yet recognized in
earnings was $1,472 at December 31, 2007. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures.
Employee
Activity – ESPP
Under
the ESPP, the Company is authorized to issue up to a remaining 469,701
shares of common stock to employees of the Company. For the years ended December
31, 2007 and 2006, participants under the plan purchased 9,378 and 9,237
shares, respectively, at an average price of $27.66 and $28.54 per share,
respectively. The weighted-average fair value of each purchase right under the
ESPP granted for the years ended December 31, 2007 and 2006, which is equal to
the discount from the market value of the common stock at the end of each six
month purchase period, was $5.09 and $4.90 per share, respectively. Share-based
compensation expense of $48 and $45 was recognized in salaries, wages and
employee benefits, during the years ended December 31, 2007 and 2006,
respectively.
Non-employee
Directors – Non-vested shares
On May 22, 2007, the Company’s
shareholders approved the Company’s Amended and Restated Non-Employee Director
Stock Plan (the “Amended Plan”). The Amended Plan is designed to
better enable the Company to attract and retain well-qualified persons for
service as directors of the Company. Under the Amended Plan, on the
first business day after each Annual Meeting of Shareholders, each non-employee
director will automatically be granted an award (the “Annual Grant”), in such
form and size as the Board determines from year to year. Unless
otherwise determined by the Board, Annual Grants will become vested and
nonforfeitable one year after the date of grant so long as the non-employee
director’s service with the Company does not earlier terminate. Each
director may elect to defer receipt of the shares under a non-vested share award
until the director terminates service on the Board of Directors. If a
director elects to defer receipt, the Company will issue deferred stock units to
the director, which do not represent actual ownership in shares and the director
will not have voting rights or other incidents of ownership until the shares are
issued. However, the Company will credit the director with dividend
equivalent payments in the form of additional deferred stock units for each cash
dividend payment made by the Company. After approval of the Amended
Plan, 14,268 non-vested shares and 4,756 deferred stock units were issued to the
Company’s non-employee directors with a weighted-average fair value of
$33.64. The share-based compensation for these awards are recognized,
net of estimated forfeitures, ratably over the requisite service period, or
vesting period, of one year. Share-based compensation expense related
to the
Amended Plan of $373 was recognized in salaries, wages and employee benefits
during the year ended December 31, 2007. The total tax benefit
related to the share-based expense was $141 for the year ended December 31,
2007. Total compensation cost, net of estimated forfeitures, related to the
non-vested shares and deferred stock units not yet recognized in earnings was
$267 at December 31, 2007. Total unrecognized compensation cost will
be adjusted for future changes in estimated forfeitures.
On May
23, 2006, the Company’s shareholders approved the Company’s 2006 Non-Employee
Director Stock Plan (the “2006 Plan”). During 2006, 11,250 non-vested
shares and 2,250 deferred stock units were issued to the Company’s non-employee
directors with a weighted-average fair value of $36.27. In April
2007, 375 non-vested shares with fair values of $30.88 per share were issued to
a new non-employee director During the years ended December 31,
2007 and 2006, share-based compensation expense of $179 and $82, respectively,
was recognized in salaries, wages and employee benefits for non-vested shares
granted to non-employees directors since May 2006 under the Company’s 2006
Non-Employee Director Stock Plan (the “2006 Plan”). The total tax
benefits related to this share-based expense was $68 and $31 for the years ended
December 31, 2007 and 2006, respectively.
During
the year ended December 31, 2007, 3,750 previously non-vested shares and 750
deferred stock units with a total grant date fair value of $163 vested to
non-employee directors, leaving 7,875 non-vested shares and 1,500 deferred stock
units outstanding at December 31, 2007. Total compensation cost, net
of estimated forfeitures, related to these non-vested shares granted to
non-employee directors not yet recognized in earnings was $240 at December 31,
2007. Total unrecognized compensation cost will be adjusted for future changes
in estimated forfeitures.
F-21
FORWARD AIR
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
6.
|
Shareholders’
Equity, Stock Options and Net Income per
Share (Continued)
|
Non-employee
Directors - Options
In addition to the above activity, each
May from 1995 to 2005 options were granted to the non-employee directors of the
Company. The options have terms of ten years and are fully exercisable. At
December 31, 2007, 111,875 options were outstanding and will expire between July
2010 and May 2015. At December 31, 2007, the total aggregate intrinsic
value of these options was $1,145 and the weighted-average exercise price and
remaining contractual term were $22 and 5.7 years, respectively.
Net
Income Per Share
The
following table sets forth the computation of net income per basic and diluted
share:
|
2007
|
2006
|
2005
|
||||||||||
|
Numerator:
|
||||||||||||
|
Numerator
for basic and diluted net income per share
|
$ | 44,925 | $ | 48,923 | $ | 44,909 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic net income per share - weighted-average shares (in
thousands)
|
29,609 | 31,091 | 31,847 | |||||||||
|
Effect
of dilutive stock options and non-vested shares
(in thousands)
|
353 | 430 | 572 | |||||||||
|
Denominator
for diluted net income per share - adjusted weighted-average shares
(in thousands)
|
29,962 | 31,521 | 32,419 | |||||||||
|
Basic
net income per share
|
$ | 1.52 | $ | 1.57 | $ | 1.41 | ||||||
|
Diluted
net income per share
|
$ | 1.50 | $ | 1.55 | $ | 1.39 | ||||||
The
number of options and non-vested shares that could potentially
dilute income per basic share in the future, but that were not
included in the computation of income per diluted share because to do
so would have been anti-dilutive for the periods presented, were approximately
120,000, 105,000 and 3,000 in 2007, 2006 and 2005, respectively.
|
7.
|
Income
Taxes
|
The
provision for income taxes consists of the following:
|
2007
|
2006
|
2005
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 23,179 | $ | 25,663 | $ | 22,706 | ||||||
|
State
|
3,613 | 4,094 | 3,670 | |||||||||
| 26,792 | 29,757 | 26,376 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
525 | (57 | ) | (50 | ) | |||||||
|
State
|
71 | (79 | ) | 2 | ||||||||
| 596 | (136 | ) | (48 | ) | ||||||||
| $ | 27,388 | $ | 29,621 | $ | 26,328 | |||||||
The tax
benefits associated with the exercise of stock options during the years ended
December 31, 2007, 2006 and 2005 were $1,261, $1,967 and $5,074,
respectively, and are reflected as an increase in additional paid-in capital in
the accompanying consolidated statements of shareholders’ equity.
In
addition to the provision for income taxes included in the accompanying
consolidated statements of income, a deferred tax benefit of approximately $2 is
included in other comprehensive income for the year ended December 31,
2005.
F-22
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
7.
|
Income Taxes
(Continued)
|
The
historical income tax expense differs from the amounts computed by applying the
federal statutory rate of 35.0% to income before income taxes as
follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Tax
expense at the statutory rate
|
$ | 25,310 | $ | 27,490 | $ | 24,933 | ||||||
|
State
income taxes, net of federal benefit
|
2,574 | 2,839 | 2,386 | |||||||||
|
Meals
and entertainment
|
289 | 233 | 207 | |||||||||
|
Tax-exempt
interest income
|
(406 | ) | (1,005 | ) | (872 | ) | ||||||
|
Federal
income tax credits
|
(498 | ) | -- | -- | ||||||||
|
Other
|
119 | 64 | (326 | ) | ||||||||
| $ | 27,388 | $ | 29,621 | $ | 26,328 | |||||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax liabilities and assets are as follows:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Accrued
expenses
|
$ | 2,509 | $ | 1,917 | ||||
|
Allowance
for doubtful accounts
|
440 | 351 | ||||||
|
Non-compete
agreements
|
488 | 260 | ||||||
|
Share-based
compensation
|
1,426 | 854 | ||||||
|
Accruals
for income tax contingencies
|
478 | -- | ||||||
|
Net
operating loss carryforwards
|
408 | 408 | ||||||
|
Total
deferred tax assets
|
5,749 | 3,790 | ||||||
|
Valuation
allowance
|
(408 | ) | (408 | ) | ||||
|
Total
deferred tax assets, net of valuation allowance
|
|
5,341 | 3,382 | |||||
|
Deferred
tax liabilities:
|
||||||||
|
Tax
over book depreciation
|
7,412 | 5,943 | ||||||
|
Research
and development expenses
|
-- | 12 | ||||||
|
Prepaid
expenses deductible when paid
|
1,163 | 1,090 | ||||||
|
Other
|
2,351 | 1,746 | ||||||
|
Total
deferred tax liabilities
|
10,926 | 8,791 | ||||||
|
Net
deferred tax liabilities
|
$ | (5,585 | ) | $ | (5,409 | ) | ||
The
balance sheet classification of deferred income taxes is as
follows:
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
assets
|
$ | 1,786 | $ | 1,178 | ||||
|
Noncurrent
liabilities
|
(7,371 | ) | (6,587 | ) | ||||
| $ | (5,585 | ) | $ | (5,409 | ) | |||
F-23
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
7.
|
Income
Taxes (Continued)
|
Total
income tax payments, net of refunds, during fiscal years 2007, 2006 and
2005 were $20,995, $26,019 and $22,476, respectively.
At
December 31, 2007 and 2006, the Company had state net operating loss
carryforwards of $8,425 that will expire between 2013 and 2024. The use of these
state net operating losses is limited to the future taxable income of separate
legal entities. As a result, the valuation allowance has been provided for
certain state loss carryforwards. The valuation allowance was unchanged during
2007. Based on expectations of future taxable income, management believes that
it is more likely than not that the results of operations will not generate
sufficient taxable income to realize the deferred tax assets.
Income
Tax Contingencies
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, various states and Canada. With a few exceptions, the Company is
no longer subject to U.S. federal, state and local, or Canadian examinations by
tax authorities for years before 2003.
The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a $1,397 increase in the
liability for income tax contingencies, including related interest and
penalties, which net of federal benefit of $420 was accounted for as a reduction
to the January 1, 2007 balance of retained earnings. The total liability
for
income tax contingencies at January 1, 2007, net of federal benefit is
$977. A reconciliation of the beginning and ending amount of
unrecognized tax benefit is as follows:
|
Liability
for
|
||||
|
Unrecognized
Tax
|
||||
|
Benefits
|
||||
|
Balance
at January 1, 2007
|
$ | 1,020 | ||
|
Additions
for tax positions of current year
|
157 | |||
|
Reduction
for lapses of 2003 state statute of limitations
|
60 | |||
|
Balance
at December 31, 2007
|
$ | 1,117 | ||
Included
in the liability for unrecognized tax benefits at December 31, 2007 and January
1, 2007 are tax positions of $1,117 and $1,020 respectively, which represents
tax positions where the realization of the ultimate benefit is uncertain and the
disallowance of which would affect the Company’s annual effective income tax
rate.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. Included in the liability
for unrecognized tax benefits at December 31, 2007 and January 1, 2007, are
accrued penalties of $220 and $195, respectively. The liability for
unrecognized tax benefits at December 31, 2007 and January 1, 2007 also included
accrued interest of $240 and $182, respectively. During the year
ended December 31, 2007, the company accrued an additional $59 and $24,
respectively, for potential interest and penalties.
|
8.
|
Operating
Leases
|
The
Company leases certain facilities under noncancellable operating leases that
expire in various years through 2017. Certain of these leases may be renewed for
periods varying from one to ten years.
Sublease
rental income, including amounts from related parties (see note 9), was $452,
$622 and $447 in 2007, 2006 and 2005. The Company expects to receive
aggregate future minimum rental payments under noncancellable subleases of
approximately $165.
F-24
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
8.
|
Operating
Leases (Continued)
|
Future
minimum rental payments under noncancellable operating leases with initial or
remaining terms in excess of one year consisted of the following at December 31,
2007:
|
2008
|
$ | 13,524 | ||
|
2009
|
10,702 | |||
|
2010
|
8,756 | |||
|
2011
|
5,419 | |||
|
2012
|
2,130 | |||
|
Thereafter
|
2,360 | |||
|
Total
|
$ | 42,891 |
|
9.
|
Transactions With Related
Parties
|
Transactions
with Landair Transport, Inc.
Scott M.
Niswonger, Chairman of the Board of the Company until May 2005, owns a majority
interest in the parent company of Landair Transport, Inc. (“Landair”). Until
September 2005, the Company had a sublease with Landair pursuant to which the
Company sublet to Landair a portion of the headquarters of the Company in
Greeneville, Tennessee that is leased from the Greeneville-Greene County Airport
Authority. The Company sublet the facility to Landair for consideration based
upon the cost of such
facility to the Company and an agreed-upon percentage of usage. Sublease rental
income charged to Landair in 2005 was approximately $17. This amount
is included in the 2005 sublease rental income disclosed in note 8.
Transactions
With Sky Night, LLC
During
2007, 2006 and 2005, the Company purchased air transportation services from
Sky Night, LLC (“Sky Night”), a limited liability corporation owned by Scott M.
Niswonger. The air charter expense totaled approximately $64, $143,
and $105 in 2007, 2006 and 2005, respectively, and is included in other
operating expenses in the accompanying consolidated statements of
income.
During
2001, the Company entered into an agreement to sublease hangar space at its
Greeneville, Tennessee headquarters to Sky Night. The initial term of the
sublease was for 12 months. Currently, the hangar space is being sublet on a
month-to-month basis. Sublease rental income charged to Sky Night was
approximately $35 in 2007, 2006 and 2005.
|
10.
|
Commitments
and Contingencies
|
The
primary claims in the Company’s business are workers’ compensation, property
damage, vehicle liability and medical benefits. Most of the Company’s insurance
coverage provides for self-insurance levels with primary and excess coverage
which management believes is sufficient to adequately protect the Company from
catastrophic claims. In the opinion of management, adequate provision has been
made for all incurred claims, including provision for estimated claims
incurred but not reported.
The
Company estimates its self-insurance loss exposure by evaluating the merits and
circumstances surrounding individual known claims, by performing hindsight
analysis to determine an estimate of probable losses on claims incurred but not
reported, and through the use of actuarial calculations.
Because
of the uncertainty of the ultimate resolution of outstanding claims, as well as
uncertainty regarding claims incurred but not reported, it is possible that
management’s provision for these losses could change materially in the near
term. However, no estimate can currently be made of the range of additional loss
that is at least reasonably possible.
F-25
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
10.
|
Commitments
and Contingencies
(Continued)
|
Atlanta
Terminal Condemnation
During
the fourth quarter of 2002, the City of Atlanta filed a Petition for
Condemnation and Declaration of Taking for a terminal facility owned by
Transportation Properties, Inc. and leased by Forward Air, Inc., two of the
Company’s wholly owned subsidiaries. The condemnation was filed in connection
with the fifth runway airport expansion project at Atlanta Hartsfield-Jackson
International Airport. According to the 2002 condemnation petition, the City of
Atlanta took ownership of the property and building and deposited $2,600 into
the Registry of the Superior Court of Clayton County, Georgia (the “Court”) as
compensation to Transportation Properties, Inc. The Company filed a protest to
the City of Atlanta’s evaluation of the property and building and also
challenged the method of condemnation it utilized. Prior to December 2003, the
City of Atlanta destroyed the condemned building in conjunction with the runway
expansion project. On or about December 30, 2003, the Court ruled that the City
of Atlanta’s method of condemnation was improper and returned ownership of the
land to the Company.
During
January 2004, the City of Atlanta filed a second condemnation petition to obtain
title to the land. In connection with this second petition, the City of Atlanta
deposited an additional $1,261 into the Registry of the Court, which was the
City of Atlanta’s estimated fair market value of the land. The City of Atlanta
petitioned the Court and was granted the right to withdraw the original $2,600
escrow balance it paid into the Court as part of the first petition for
condemnation. The Company and its outside counsel believed that the December 30,
2003 ruling by the Court and the City of Atlanta’s actions subsequent to the
first condemnation gave rise to additional theories of recovery. The Company
challenged the method of condemnation set forth in the second petition and the
withdrawal of the original $2,600 escrow balance. Additionally, the Company had
claims for damages arising from the City of Atlanta’s destruction of the
Company’s building during the wrongful possession of the property by the City of
Atlanta. As of December 31, 2004, the Company had received the $1,261 escrow
into cash and had a $1,339 receivable for the difference in the original $2,600
escrow and actual $1,261 in escrow received.
In the
second quarter of 2005, an agreement was reached with the City of Atlanta to
settle the dispute. In the settlement, the City of Atlanta paid the Company
approximately $2,765, which represents payment of the receivable of $1,339 along
with additional pre-tax gain of approximately $1,426, included in other income,
net. The cash received is net of attorney’s fees.
|
11.
|
Employee Benefit
Plan
|
The
Company has a retirement savings plan (the “401(k) Plan”). The 401(k) Plan is a
defined contribution plan whereby employees who have completed 90 days of
service, a minimum of 1,000 hours of service and are age 21 or older are
eligible to participate. The 401(k) Plan allows eligible employees to make
contributions of 2.0% to 80.0% of their annual compensation. Employer
contributions were made at 25.0% during 2007, 2006 and 2005 of the employee’s
contribution up to a maximum of 6.0% for all periods presented of total annual
compensation except where government limitations prohibit.
Employer
contributions vest 20.0% after two years of service and continue vesting 20.0%
per year until fully vested. The Company’s matching contributions expensed in
2007, 2006 and 2005 were approximately $405, $365 and $256,
respectively.
|
12.
|
Financial
Instruments
|
Off
Balance Sheet Risk
At
December 31, 2007, the Company had letters of credit outstanding totaling $8,280
as required by its workers’ compensation and vehicle liability insurance
providers.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash investments and trade accounts
receivable. The Company does not generally require collateral from its
customers. Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of entities comprising the
Company’s customer base and their dispersion across many different
industries.
F-26
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
12.
|
Financial Instruments
(Continued)
|
Fair
Value of Financial Instruments
The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Investments: The
carrying amount for investments in available-for-sale securities was reported in
the consolidated balance sheet at fair market value.
Accounts
receivable and accounts payable: The carrying amounts reported in the balance
sheet for accounts receivable and accounts payable approximate their fair value
based on their short-term nature.
Debt and
capital lease obligations: The fair value of the Company’s capital lease and
other long-term debt obligations are estimated using discounted cash flow
analyses, based on the Company’s current incremental borrowing rates for similar
types of borrowing arrangements, and does not differ materially from the
carrying amount. The senior credit facility bears interest at
variable rates, therefore its carrying amount approximates fair
value.
|
13.
|
Segment
Reporting
|
The
Company operates in two reportable segments, based on differences in services
provided. Forward Air provides time-definite transportation and
logistics services to the deferred air freight market. FASI provides
pool distribution services primarily to regional and national distributors and
retailers.
The
accounting policies of the segments are the same as those described in the
“Summary of Significant Accounting Policies.” Segment data includes
intersegment revenues. Assets and costs of the corporate headquarters
are allocated to the segments based on usage. The Company evaluates
the performance of its segments based on net income. The Company’s
business is conducted principally in the U.S. and Canada.
The
following table summarizes segment information about net
income and assets used by the chief operating decision maker of the
Company in making decisions regarding allocation of assets and resources as of
and for the year ended December 31, 2007. No segment
information has been presented for the years ended December 31, 2006 and 2005 as
FASI did not exist until July 30, 2007 and all 2006 and 2005 data would have
been solely related to Forward Air.
|
Forward
Air
|
FASI
|
Eliminations
|
Consolidated
|
|||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
External
revenues
|
$ | 376,711 | $ | 16,026 | $ | -- | $ | 392,737 | ||||||||
|
Intersegment
revenues
|
108 | -- | (108 | ) | -- | |||||||||||
|
Depreciation
and amortization
|
10,372 | 452 | -- | 10,824 | ||||||||||||
|
Stock-based
compensation expense
|
3,698 | 12 | -- | 3,710 | ||||||||||||
|
Interest
expense
|
452 | 39 | -- | 491 | ||||||||||||
|
Interest
income
|
1,745 | 5 | -- | 1,750 | ||||||||||||
|
Income
tax expense
|
26,498 | 890 | -- | 27,388 | ||||||||||||
|
Net
income
|
43,531 | 1,394 | -- | 44,925 | ||||||||||||
|
Total
assets
|
236,978 | 17,910 | (13,004 | ) | 241,884 | |||||||||||
|
Capital
expenditures
|
42,986 | 4,040 | -- | 47,026 | ||||||||||||
F-27
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2007
|
14.
|
Quarterly Results of Operations
(Unaudited)
|
The
following is a summary of the quarterly results of operations for the years
ended December 31, 2007 and 2006:
|
2007
|
||||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
Operating
revenue
|
$ | 87,353 | $ | 93,147 | $ | 97,746 | $ | 114,491 | ||||||||
|
Income
from operations
|
15,839 | 18,313 | 16,904 | 19,992 | ||||||||||||
|
Net
income
|
10,293 | 11,475 | 10,753 | 12,404 | ||||||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
$ | 0.34 | $ | 0.38 | $ | 0.36 | $ | 0.43 | ||||||||
|
Diluted
|
$ | 0.34 | $ | 0.38 | $ | 0.36 | $ | 0.43 | ||||||||
|
2006
|
||||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
Operating
revenue
|
$ | 82,330 | $ | 86,779 | $ | 90,441 | $ | 93,208 | ||||||||
|
Income
from operations
|
16,956 | 19,767 | 19,788 | 18,885 | ||||||||||||
|
Net
income
|
11,008 | 13,021 | 12,725 | 12,169 | ||||||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
$ | 0.35 | $ | 0.41 | $ | 0.41 | $ | 0.40 | ||||||||
|
Diluted
|
$ | 0.35 | $ | 0.41 | $ | 0.41 | $ | 0.40 | ||||||||
F-28
Schedule
II — Valuation and Qualifying Accounts
|
Col.
A
|
Col.
B
|
Col.
C
|
Col.
D
|
Col.
E
|
|||||||||||||
|
(1)
|
(2)
|
||||||||||||||||
|
Balance
|
Charged
|
Charged
|
|||||||||||||||
|
at
|
to
Costs
|
to
Other
|
Balance
|
||||||||||||||
|
Beginning
|
and
|
Accounts
|
Deductions
|
at
End of
|
|||||||||||||
|
of
Period
|
Expenses
|
Describe
|
-Describe
|
Period
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||||||
|
Year
ended December 31, 2007:
|
|||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
624
|
$
|
(33
|
)
|
$
|
--
|
$
|
(214
|
)
|
(2)
|
$
|
805
|
||||
|
Allowance
for revenue adjustments
|
(1)
|
236
|
2,312
|
--
|
2,211
|
(3)
|
337
|
||||||||||
|
860
|
2,279
|
--
|
1,997
|
1,142
|
|||||||||||||
|
Year
ended December 31, 2006:
|
|||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
637
|
$
|
(223
|
)
|
$
|
--
|
$
|
(210
|
)
|
(2)
|
$
|
624
|
||||
|
Allowance
for revenue adjustments
|
(1)
|
285
|
2,095
|
--
|
2,144
|
(3)
|
236
|
||||||||||
|
922
|
1,872
|
--
|
1,934
|
860
|
|||||||||||||
|
Year
ended December 31, 2005:
|
|||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
826
|
$
|
(121
|
)
|
$
|
$
|
68
|
(2)
|
$
|
637
|
||||||
|
Allowance
for revenue adjustments
|
(1)
|
246
|
2,100
|
--
|
2,061
|
(3)
|
285
|
||||||||||
|
1,072
|
1,979
|
--
|
2,129
|
922
|
|||||||||||||
|
(1) Represents
an allowance for adjustments to accounts receivable due to disputed rates,
accessorial charges and other aspects of
|
|||||||||||||||||
|
previously billed shipments.
|
|||||||||||||||||
|
(2) Uncollectible
accounts written off, net of recoveries.
|
|||||||||||||||||
|
(3) Adjustments
to billed accounts receivable.
|
|||||||||||||||||
S-1
|
Exhibit
|
||
|
No.
|
||
|
3.1
|
Restated
Charter of the registrant (incorporated herein by reference to Exhibit 3
to the registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 28, 1999 (File No.
0-22490))
|
|
|
3.2
|
Amended
and Restated Bylaws of the registrant (incorporated herein by reference to
Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2007 filed with the Securities and
Exchange Commission on August 2, 2007 (File No.
0-22490))
|
|
|
4.1
|
Form
of Landair Services, Inc. Common Stock Certificate (incorporated herein by
reference to Exhibit 4.1 to the registrant’s Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on September
27, 1993 (File No. 0-22490))
|
|
|
4.2
|
Form
of Forward Air Corporation Common Stock Certificate (incorporated herein
by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998 (File No.
0-22490))
|
|
|
4.3
|
Rights
Agreement, dated May 18, 1999, between the registrant and SunTrust Bank,
Atlanta, N.A., including the Form of Rights Certificate (Exhibit A) and
the Form of Summary of Rights (Exhibit B) (incorporated herein by
reference to Exhibit 4 to the registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 28, 1999 (File
No. 0-22490))
|
|
|
10.1*
|
Forward
Air Corporation 2005 Employee Stock Purchase Plan (incorporated herein by
reference to the registrant’s Proxy Statement filed with the Securities
and Exchange Commission on April 20, 2005 (File No.
0-22490))
|
|
|
10.2*
|
Amended
and Restated Stock Option and Incentive Plan (incorporated herein by
reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form
10-Q for the period ended June 30, 1995 filed with the Securities and
Exchange Commission on August 14, 1995 (File No.
0-22490))
|
|
|
10.3
|
Lease Agreement, dated as of June
1, 2006, between the Greeneville-Greene County Airport Authority and the
registrant (incorporated herein by reference to Exhibit 10.3 to the
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 2006 filed with the Securities and Exchange Commission on February 27,
2007 (File No. 0-22490))
|
|
|
10.4
|
Air
Carrier Certificate, effective August 28, 2003 (incorporated herein by
reference to Exhibit 10.5 to the registrant’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 filed with the Securities and
Exchange Commission on March 11, 2004 (File No.
0-22490))
|
|
|
10.5*
|
Non-Employee
Director Stock Option Plan (incorporated herein by reference to Exhibit
10.2 to the registrant’s Quarterly Report on Form 10-Q for the period
ended June 30, 1995 filed with the Securities and Exchange Commission on
August 14, 1995 (File No. 0-22490))
|
|
|
10.6*
|
Amendment
to the Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.7 to the registrant’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 filed with the Securities and
Exchange Commission on March 11, 2004 (File No.
0-22490))
|
|
|
10.7
|
Amended
and Restated Loan and Security Agreement, dated as of September 10, 1998,
between First Tennessee Bank National Association and the registrant
(incorporated herein by reference to Exhibit 10.5 to the registrant’s
Quarterly Report on Form 10-Q for the period ended September 30, 1998
filed with the Securities and Exchange Commission on November 16, 1998
(File No. 0-22490))
|
|
|
10.8
|
Modification
Agreement (to Amended and Restated Loan and Security Agreement), dated as
of June 18, 2002, among the registrant, First Tennessee Bank National
Association, FAF, Inc., Forward Air, Inc. and Transportation Properties,
Inc. (incorporated herein by reference to Exhibit 10.1 to the registrant’s
Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed
with the Securities and Exchange Commission on August 14, 2002 (File No.
0-22490))
|
|
|
10.9
|
Letter
Agreement, dated May 17, 2005, between the registrant and First Tennessee
Bank National Association extending the maturity date of the registrant’s
$20.0 million Master Secured Promissory Note under the Amended and
Restated Loan and Security Agreement, dated as of September 10, 1998, as
modified by Modification Agreement, dated as of June 18, 2002
(incorporated herein by reference to Exhibit 10.1 to the registrant’s
Quarterly Report on Form 10-Q for the period ended June 30, 2005 filed
with the Securities and Exchange Commission on August 9, 2005 (File No.
0-22490))
|
|
|
10.10
|
Letter
Agreement, dated as of May 25, 2006, between the registrant and First
Tennessee Bank National Association extending the maturity date of the
registrant’s $20.0 million Master Secured Promissory Note under the
Amended and Restated Loan and Security Agreement, dated as of September
10, 1998, as modified by Modification Agreement, dated as of June 18, 2002
and by Letter Agreement, dated May 17, 2005 (incorporated herein by
reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form
10-Q for the period ended June 30, 2006 filed with the Securities and
Exchange Commission on August 4, 2006 (File No.
0-22490))
|
|
|
10.11
|
Five-year
senior, unsecured revolving credit facility (incorporated by reference to
Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 11, 2007 (File No.
0-22490))
|
|
|
10.12*
|
Employment
Agreement dated October 30, 2007, between Forward Air Corporation and
Bruce A. Campbell, including Attachment B, Restrictive Covenants Agreement
entered into contemporaneously with and as part of the Employment
Agreement (incorporated herein by reference to Exhibit 99.1 to the
registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 31, 2007 (File No.
0-22490))
|
|
|
10.13*
|
Form
of Incentive Stock Option Agreement under the registrant’s Amended and
Restated Stock Option and Incentive Plan, as amended and 1999 Stock Option
and Incentive Plan, as amended, for grants prior to February 12, 2006
(incorporated herein by reference to Exhibit 10.12 to the registrant’s
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005
filed with the Securities and Exchange Commission on March 22, 2006 (File
No. 0-22490))
|
|
|
10.14*
|
Form
of Non-Qualified Stock Option Agreement under the registrant’s
Non-Employee Director Stock Option Plan, as amended, for grants prior to
February 12, 2006 (incorporated herein by reference to Exhibit 10.13 to
the registrant’s Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2005 filed with the Securities and Exchange Commission on
March 22, 2006 (File No. 0-22490))
|
|
|
10.15*
|
1999
Stock Option and Incentive Plan (incorporated herein by reference to
Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the
period ended March 31, 1999 filed with the Securities and Exchange
Commission on May 17, 1999 (File No. 0-22490))
|
|
|
10.16*
|
Amendment
to the 1999 Stock Option and Incentive Plan (incorporated herein by
reference to Exhibit 10.14 to the registrant’s Annual Report of Form 10-K
for the fiscal year ended December 31, 2003 filed with the Securities and
Exchange Commission on March 11, 2004 (File No.
0-22490))
|
|
|
10.17*
|
Non-Qualified
Stock Option Agreement dated August 21, 2000 between the registrant and
Ray A. Mundy (incorporated herein by reference to Exhibit 10.1 to the
registrant’s Quarterly Report on Form 10-Q for the period ended September
30, 2000 filed with the Securities and Exchange Commission on November 6,
2000 (File No. 0-22490))
|
|
|
10.18
|
Forward
Air Corporation Section 125 Plan (incorporated herein by reference to
Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 15, 2002 (File No. 0-22490))
|
|
|
10.19*
|
Form
of Option Restriction Agreement between the registrant and each executive
officer regarding certain restrictions on transferability of accelerated
stock options granted under the registrant’s 1999 Stock Option and
Incentive Plan, as amended (incorporated herein by reference to Exhibit
10.18 to the registrant’s Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2005 filed with the Securities and Exchange Commission
on March 22, 2006 (File No. 0-22490))
|
|
|
10.20*
|
Form
of Restricted Stock Agreement for an award of restricted stock under the
registrant’s 1999 Stock Option and Incentive Plan, as amended, granted on
or after February 12, 2006 (incorporated herein by reference to Exhibit
10.19 to the registrant’s Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2005 filed with the Securities and Exchange Commission
on March 22, 2006 (File No. 0-22490))
|
|
|
10.21*
|
2006
Non-Employee Director Stock Plan (incorporated herein by reference
to Appendix A of the registrant’s Proxy Statement filed with the
Securities and Exchange Commission on April 24, 2006 (File No.
22490))
|
|
10.22*
|
Form
of Non-Employee Director Restricted Stock Agreement for an award of
restricted stock under the registrant's 2006 Non-Employee Director Stock
Plan (incorporated herein by reference to Exhibit 99.2 to the
registrant's Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on May 19, 2006 (File No.
22490))
|
|
|
10.23*
|
Schedule
of Non-Employee Director Compensation effective May 24, 2006 (incorporated
herein by reference to Exhibit 99.1 to the registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 23, 2006
(File No. 0-22490))
|
|
|
10.24
|
Agreement
of Purchase and Sale, dated as of July 10, 2006, among AMB Property II,
L.P., Headlands Realty Corporation and Forward Air, Inc. (incorporated
herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2006 filed with the
Securities and Exchange Commission on August 4, 2006 (File No.
0-22490))
|
|
|
10.25
|
Agreement
of Purchase and Sale, dated as of September 14, 2006, by and between
Headlands Realty Corporation and Forward Air, Inc. (incorporated herein by
reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2006 filed with the
Securities and Exchange Commission on November 3, 2006 (File No.
0-22490))
|
|
|
10.26
|
Asset
Purchase Agreement dated November 26, 2007 by and among Forward Air
Corporation, Black Hawk Freight Services, Inc. and the stockholders of
Black Hawk Freight Services, Inc. (incorporated herein by reference to
Exhibit 2.1 to the registrant’s current report on 8-K filed with the
Securities and Exchange Commission on November 30, 2007 (file No.
000-22490))
|
|
|
14.1
|
Code
of Ethics (incorporated herein by reference to Exhibit 14.1 to the
registrant’s Annual Report on Form 10-K for the fiscal year ended December
31, 2003 filed with the Securities and Exchange Commission on March 11,
2004 (File No. 0-22490))
|
|
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21.1
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Subsidiaries
of the registrant (incorporated herein by reference to Exhibit 21.1 to the
registrant’s Annual Report on Form 10-K for the fiscal year ended December
31, 2000 filed with the Securities and Exchange Commission on April 2,
2001 (File No. 0-22490))
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23.1
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Consent of Ernst & Young LLP,
Independent Registered Public Accounting Firm
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31.1
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Certification of Chief Executive
Officer Pursuant to Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a))
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31.2
|
Certification of Chief Financial
Officer Pursuant to Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a))
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32.1
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Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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32.2
|
Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
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*Denotes
a management contract or compensatory plan or arrangement.